Materiality-material misstatement


Question 1: In the ARM, AR = IR * CR * DR, which type of risk is considered to be more in the auditor's "control," as compared to the others?

a) Detection risk
b) Inherent risk
c) Control risk
d) Audit risk

Question 2: True or false. Materiality is always a matter of dollar amount.

a) True.
b) False.

Question 3: Which of the following is/are not among the management assertions corroborated by audit evidence? (more than one answer possible)

a) Existence/occurrence.
b) Completeness/cutoff.
c) Rights & obligations.
d) Valuation and allocation.
e) Presentation and disclosure.
f) The butler did it in the dining room with the gun.

Question 4: True or False. Auditors are responsible for creating financial statements free of material misstatement.

a) True.
b) False.

Question 5: Select the best answer.

a) Auditing financial statements engagements = subset of attestation engagements = subset of assurance engagements.
b) Assurance is a subset of auditing. All assurance engagements are audits, but not all audits are assurance engagements.
c) Attestation is a subset of auditing. All attestation engagements are audits, but not all audits are attestation engagements.

Question 6: Which of the given are needed to become a CPA in Texas (several answers might apply).

a) Meeting certain educational requirements
b) Passing the Texas CPA exam
c) Obtaining professional experience under the supervision of a CPA.

Question 7: The Accounting Standards Board (ASB) lists three fundamental principles of auditing: responsibilities, performance, and reporting. Fulfilling the performance principle, an auditor has to obtain a reasonable level of assurance (but not absolute) that the presentation of the financial statements as a whole are free of material misstatement whether due to fraud or error.

Meeting this requirement needs all of the following except:

a) Plan work and supervise assistants.
b) Determine and apply materiality levels.
c) Recognize and assess the risk of material misstatement whether due to fraud or error, based on an understanding of the entity, its environment, and its internal controls.
d) Meet the parents.
e) Design and implement proper responses to assessed risks in order to obtain sufficient, proper audit evidence regarding whether material misstatements exist.

Question 8: True or false. Each of the given sources of rules of conduct can be said to be part of the "alphabet soup" of ethics rule makers:

State boards of accountancy
AICPA
State societies of CPAs
SEC
PCAOB

a) True
b) False

Question 9. True or false. When an auditor is put in a position of having to review his or her own work, there may be an independence issue.

a) True
b) False

Question 10: Match terms with their best definitions.

Potential Matches:

1) wrongful or criminal deception intended to result in financial or personal gain
2) mistake
3) breakfast food of debatable deliciousness
4) management deliberately misleads creditors, investors, and/or other users of information by making material misrepresentations of fact

a) Fraud
b) Error
c) Management fraud
d) Frosted mini wheats

Question 11: If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.5) and inherent risk remains constant, the acceptable level of detection risk is most likely to:

a) Change from 0.25 to 0.1
b) Change from 0.1 to 0.04
c) Not change
d) Change from 0.2 to 0.3

Question 12: Match term to definition.

Potential Matches:

1) Testing management assertion of existence/occurrence. Testing "down." Checking summary listing (journal) against source documents.
2) Testing management assertion of completeness. Testing "up." Checking source documents up to summary listing (journal).

a) Vouching
b) Tracing

Question 13: Match types of risks to their definitions.

Potential Matches:

1) Likelihood that an error or fraud will occur and not be caught by either internal controls or auditor procedures.
2) Likelihood that an error or fraud will not be caught by the auditor's procedures.
3) Likelihood that an error or fraud will not be caught by the client's internal controls.
4) Likelihood that an error or fraud will enter the accounting information system.

a) Detection risk
b) Audit risk
c) Control risk
d) Inherent risk

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Auditing: Materiality-material misstatement
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