When auditors allocate the preliminary judgment about materiality to account balances,

the materiality allocated to any given account balance is referred to as: *

The materiality range

The error range

Tolerable materiality

Tolerable misstatement

Only the amount of misstatements need to be considered in assessing materiality.Both

the amount and nature of misstatements need to be considered in assessing
materiality. *

True, True

False, False

False, True

True, False

The preliminary judgment about materiality is the _________ amount by which the auditor
believes the statements could be misstated and still not affect the decisions of
reasonable users. *

Minimum

Maximum

Mean average

Median average

Financial reporting frameworks often discuss the concept of materiality in the context
of the preparation and presentation of financial statements. Although financial reporting
frameworks may discuss materiality in different terms, they generally explain that *
 Misstatements, including omissions, are considered to be material if they, individually or in
the aggregate, could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements

Judgments about materiality are made in the light of surrounding circumstances, and are
affected by the size or nature of a misstatement, or a combination of both

Judgments about matters that are material to users of the financial statements are based on
a consideration of the common financial information needs of users as a group. The
possible effect of misstatements on specific individual users, whose needs may vary widely,
is not considered.

All of the above

Why do auditors establish a preliminary judgment about materiality? *

To determine the appropriate level of audit experience required for the work.

So that the client can know what records to make available to the auditor.

To plan the appropriate audit evidence to accumulate and develop an overall audit strategy.

To finalize the assessment of control risk.

Determining a materiality level for the financial statements as a whole requires the
exercise of professional judgment. A percentage is often applied to a chosen
benchmark as a starting point in that determination. Factors that may affect the
identification of an appropriate benchmark include the following: *

The elements of the financial statements (e.g., assets, liabilities, equity, income, expenses)

Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (e.g., for the purpose of evaluating financial performance
users may tend to focus on profit, revenue or net assets);

The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;

All of the above

Which of the following is not true about materiality judgment? *

The auditor’s consideration of materiality is influenced by the auditor’s perception of the needs
(importance) of users of financial statements.
 The auditor considers materiality only in relation to classes of transactions, account balances,
and disclosures.

Materiality judgments make sure that the auditor gathers sufficient evidential matter to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.

Materiality decisions differ from one audit client to another.

In considering materiality for planning purposes, an auditor believes that misstatements

aggregating Rp100,000 would have a material effect on an entity’s income statement,
but that misstatements would have to aggregate Rp200,000 to materially affect the
balance sheet. Ordinarily, it would be appropriate to design auditing procedures that
would be expected to detect misstatements that aggregate *

Rp100,000 kayanya

Rp150,000

Rp200,000

Rp300,000

Materiality should be considered by the auditor when *

Determining the nature, timing and extent of auditor’s further procedures

Identifying and assessing the risks of material misstatements

Both a and b

Neither a nor b

Which of the following would an auditor most likely use in determining the auditor’s
preliminary judgment about materiality? *

The anticipated sample size of the planned substantive tests

The entity’s annual financial statements

The results of the internal control questionnaire

The contents of the management representation letter

Auditors are _____ to decide on the combined amount of misstatements in the financial
statements that they would consider material early in the audit. *

Permitted

Required

Not allowed

Strongly encouraged

In audit of financial statements, it is considered in terms of the smallest aggregate level

of misstatements that could be considered material to any one of the statements that
comprise the financial statements, while in financial reporting, it provides a threshold or
cutoff point rather than being a primary qualitative characteristic which information
must have if it is to be useful *

Materiality

Reliability

Relevance

Misstatement

Which of the following is least likely to be appropriate as the basis for determining the
preliminary judgment about materiality in the audit of financial statements? *

Net income before taxes

Current assets

Owners’ equity

Inventory

Which of the following statements is not true? *

Inherent risk is inversely related to detection risk.

 Inherent risk is inversely related to evidence.

Inherent risk is the susceptibility of the financial statements to material error, assuming no
internal controls.

Inherent risk is the auditor’s assessment of the likelihood that errors exceeding a tolerable
amount exist in a segment before considering the effectiveness of internal controls.

Assume that control risk = 0.70, inherent risk = 0.80, and audit risk = 0.05. If a material
misstatement occurred and was not corrected by the auditee’s internal controls, what is
the risk that the misstatement would not be detected by the audit procedures? *

0.02

0.07

0.09

0.50

When discussing control risk (CR) and the audit risk model, which of the following is
false? *

CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be
prevented or detected by internal control

If the auditor concludes that internal control is completely ineffective to prevent or detect
errors, he/she would assign a low value (e.g., 0%) to CR.

The relationship between control risk and detection risk is inverse.

The relationship between control risk and evidence needed to support account balances is
direct.

Under which of the following conditions would you consider lowering individual item
materiality thresholds *

Study of the business and industry, together with the application of analytical procedures,
reveals that the client has enjoyed a surge in sales and gross profit during an industry downturn.

Application of analytical procedures shows that the client's gross profit rate is significantly
below last year and also is materially lower than the industry average.

Study of internal controls within the revenue cycle reveal material weaknesses.
 Study of internal controls within the payroll cycle confirm the auditor's belief that few errors
have occurred.

Which of the following statements is true with regard to the relationship among audit
risk, audit evidence, and materiality? *

The lower the inherent risk and control risk, the lower the aggregate materiality threshold.

Under conditions of high inherent and control risk, the auditor should place more emphasis on
obtaining external evidence and should reduce reliance on internal evidence.

Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.

Aggregate materiality thresholds should not change under conditions of changing risk levels.

If an auditor establishes a relatively high level for materiality, then the auditor will: *

accumulate more evidence than if a lower level had been set.

accumulate less evidence than if a lower level had been set.

accumulate approximately the same evidence as would be the case were materiality lower.

accumulate an undetermined amount of evidence

Which is a primary limitation of the audit risk model? *

The audit risk model does not adequately consider external forces on the client organization.

Components of audit risk are treated as independent variables even though many
interdependencies exist between them.

The audit technology achieves approximate precision outside of a mathematical model.

Control risk must be adjusted at the hands of the auditor, not by an arbitrary estimation.

Which of the following audit risk components may be assessed in nonquantitative

terms? 1.Control Risk 2. detection risk 3. inherent risk *

Yes,Yes,Yes

No,Yes,Yes

Yes, Yes,No

Yes, No,Yes
Why should the auditor plan more work on individual accounts as lower acceptable
levels of both audit risk and materiality are established? *

To find smaller errors.

To find larger errors.

To increase the tolerable error in the accounts.

To decrease the risk of overreliance.

In the audit risk model, its risk components are either determined, assessed, or
manipulated. Which of the following risks are controllable by the auditor?

Audit risk.

Control risk.

Detection risk.

Both A and C.

Which of the following is an incorrect statement? *

Detection risk cannot be changed at the auditor’s discretion

Detection risk bears an inverse relationship to inherent and control risks

The greater the inherent and control risks the auditor believes exists, the less detection risk that
can be accepted

The auditor might separate or combined assessments of inherent risk and control risk

Inherent risk is often low for an account such as: *

inventory.

marketable securities.

cash.

accounts receivable.

Which of the following best describes the relationship between IR, CR, and DR?
 DR does not vary from one assertion to another.

IR, CR, and DR vary from assertion to assertion.

IR and CR do not vary from assertion to assertion, but DR does vary from assertion to assertion.

When IR increases, DR decreases.

Inherent risk and control risk differ from detection risk in that inherent risk and control
risk *

arise from the misapplication of auditing procedures

may be assessed in either quantitative or nonquantitative terms

exist independently of the financial statement audit

can be changed at the auditor’s discretion

Which of the following statements concerning materiality thresholds is incorrect? *

Aggregate materiality thresholds are a function of the auditor's preliminary judgments concerning
audit risk.

In general, the more misstatements the auditor expects, the higher should be the aggregate
materiality threshold.

The smallest aggregate level of errors or fraud that could be considered material to any one of the
financial statements is referred to as a "materiality threshold."

Materiality thresholds may change between the planning and review stages of the audit. These
changes may be due to quantitative and/or qualitative factors.

Audit risk consists of inherent risk, control risk, and detection risk. Which of the
following statements is true? *

Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.

The risk that material misstatement will not be prevented or detected on a timely basis by internal
control can be reduced to zero by effective controls.

Detection risk is a function of the efficiency of an auditing procedure.

The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion
of the auditor.

In the audit risk model, which of the risk components can be assessed by the auditor? *
 Inherent risk.

Control risk.

Detection risk.

Both A and B.

Auditing standards _____ that the basis used to determine the preliminary judgment
about materiality be documented in the audit files. *

Permit

Do not allow

Require

Strongly encourage

Detection risk is *

The risk that the auditor gives an inappropriate audit opinion when the financial statements are
materially misstated.

The risk that a misstatement, that could occur in an account balance or class of transactions and
that could be material individually or when aggregated with misstatements in other balances or
classes, will not be prevented or detected and corrected on a timely basis by the accounting and
internal control systems.

The risk that an auditor's substantive procedures will not detect a misstatement that exists in an
account balance or class of transactions that could be material, individually or when aggregated
with misstatements in other balances or classes.

The susceptibility of an account balance or class of transactions to misstatement that could be

material, individually or when aggregated with misstatements in other balances of classes,
assuming that there were no related internal controls.

Auditors commonly allocate materiality to balance sheet accounts rather than income
statement accounts because most income statement misstatements have a(n) _____
effect on the balance sheet. *

Reduced

Equal
 Undetermined

Increased

The materiality level for the financial statements as a whole (or the materiality level for a
particular class of transactions, account balance or disclosure, if applicable) may need
to be revised (adjusted either downward or upward) as a result of the following *

a change in circumstances that occurred during the audit

new information

a change in the auditor’s understanding of the entity and its operations as a result of performing
further audit procedures.

all of the above

Which of the following statements is not true regarding audit risk assessment? *

The auditor studies the business and industry and applies analytical procedures as a basis for
assessing inherent risk.

When control risk and inherent risk are high, the auditor increases detection risk to maintain overall
audit risk at the desired level.

The auditor studies and evaluates internal control policies and procedures for assessing control
risk.

The auditor designs substantive audit procedures to reduce detection risk to an acceptable level.