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59 Cards in this Set

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If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2,
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.
When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to in SAS No. 39 as
tolerable misstatement
Why do auditors establish a preliminary judgment about materiality?
To help the auditor plan the appropriate evidence to accumulate.
If an auditor establishes a relatively low level for materiality, then the auditor will
accumulate more evidence than if a higher level had been set.
After the preliminary judgment about materiality has been established, auditors may
adjust it either downward or upward.
In an audit area that has a higher inherent risk, it would be prudent to
do all of the above.
Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of a set of financial statements?
Which of the following might not be a signal of a lack of integrity in management?
Prior criminal conviction of an assembly line foreman.
Which of the following qualitative factors may significantly influence whether an item is deemed to be material?
Misstatements that are otherwise immaterial may be material if they affect a trend in earnings
Auditors generally allocate the preliminary judgment about materiality to
the balance sheet only.
Which of the following statements regarding inherent risk is correct?
Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain experience, even when there is inherent risk.
Auditors begin their assessments of inherent risk during the planning phase. Which of the following would not be a topic of the planning phase that would also help to assess inherent risk?
Obtaining client’s agreement on the engagement letter.
Which of the following is not a difficulty associated with allocating the preliminary judgment about materiality to balance sheet accounts?
All of the above are difficulties associated with the allocation of materiality.
What is the primary means of dealing with risk in planning audit evidence?
Application of the audit risk model.
The opinion paragraph in auditors’ reports includes two important phrases that are directly related to materiality and risk. The phrases are
“in our opinion” and “in all material respects.”
The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors
base their conclusions about the statements on professional judgment.
Inherent risk is _______ related to detection risk and _______ related to the amount of audit evidence.
inversely, directly.
The five steps in applying materiality are listed below in random order: 1. Estimate the combined misstatement, 2. Estimate the total misstatement in the segment, 3. Set preliminary judgment about materiality, 4. Allocate preliminary judgment about materiality to segments, 5. Compare combined estimate with preliminary judgment about materiality. The correct sequence from start to finish would be
3 4 2 1 5.
SAS No. 47 defines the preliminary judgment about materiality as the combined amount of misstatements in the financial statements that would be considered material. This judgment
need not be quantified
Which of the following statements is not correct?
Normally, the most important base used as the criterion for deciding materiality is total assets.
Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding what is material is
net income before taxes.
Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following does not demonstrate this?
Each of the above demonstrates this concept.
The more effective the internal controls, the lower the risk factor that ______ assigned to control risk.
could be.
Allocating the preliminary judgment about materiality to segments of the financial statements is necessary because
it is required by the SEC.
Which of the following statements is not correct?
Either an overstatement of an asset account or an overstatement of a liability account would have the same effect on the income statement.
Regardless of how the allocation of the preliminary judgment about materiality was done, when the audit is complete the auditor must be confident that the combined errors in all accounts are
less than or equal to the preliminary judgment.
Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________.
acceptable audit risk.
When a different extent of evidence is needed for the various cycles, the difference is caused by
the auditor’s expectations of errors and assessment of the control structure.
If planned detection risk is reduced, the amount of substantive evidence the auditor accumulates will
When discussing control risk (CR) and the audit risk model, which of the following statements is not true?
If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he/she would assign a 0% to CR.
Which of the following is not a good indicator of the degree to which statements are relied on by external users?
Amount of net income or loss after taxes.
In situations in which the auditor believes the chance of financial failure or loss is high, and there is a corresponding increase in client business risk for the auditor, acceptable audit risk should
be reduced.
When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally
reduce acceptable audit risk and increase inherent risk.
Many account balances require estimates and/or a great deal of management judgment. One area that does not require such judgment would be
useful life of equipment for tax purposes.
Inherent risk is reduced where the likelihood of defalcations is low. This would be true for an account such as
accounts receivable.
The auditor assesses control risk and inherent risk. On a typical engagement, the auditor would be least likely to assess these for
the overall audit.
Acceptable audit risk is ordinarily set by the auditor during planning and
held constant for each major cycle and account.
When the auditor is attempting to determine the extent to which external users rely on a client’s financial statements, they may consider several factors including
all of the above.
A major limitation in the application of the audit risk model is
the difficulty in measuring the components of the model.
An auditor determines that a client has not accounted for a certain material item in conformity with generally accepted accounting principles. This fact is prominently disclosed in a footnote to the financial statements. The CPA does not agree with this departure from GAAP and should
issue a qualified the opinion because of the deviation from generally accepted accounting principles.
In determining the type of opinion to express, an auditor assesses the nature of the reporting qualifications and the materiality of their effects. Materiality will be the primary factory considered in the choice between
an “except for” opinion and an adverse opinion.
When setting a preliminary judgment about materiality,
more evidence is required for a low dollar amount than for a high dollar amount.
When allocating materiality, most practitioners choose to allocate to
the balance sheet accounts because there are fewer.
The expectation of misstatements after considering the effect of internal control is most appropriately thought of as
the combination of inherent risk and control risk.
Which one of the following statements about the cycle approach to auditing is not correct?
There are differences among cycles on the auditor’s willingness that material errors exist after the auditing is complete.
When the auditor has the same level of willingness to risk that material errors will exist after the audit is finished for all five cycles,
a different extent of evidence is needed for various cycles.
Which of the following factors is least likely to contribute to opportunities leading to misappropriation of assets?
Disregard for the need to monitor or reduce risks of misappropriating assets.
When discussing inherent risk (IR) and the audit risk model, which of the following is not true?
IR is inversely related to evidence.
When discussing acceptable audit risk (AAR) and the audit risk model, which of the following statements is true?
When the auditor decides on a lower acceptable audit risk, it means the auditor wants to be more certain that the financial statements are not materially misstated.
For financial reporting purposes, a change from straight-line to an accelerated depreciation method was disclosed in a note to the financial statements and has an immaterial effect on the current financial statements. It is expected, however, that the change will have a significant effect on future periods. The auditor should express a(n)
unqualified opinion.
Which of the following is an example of the concept of inherent risk?
Loans receivable for a finance company are less likely to be collectible than those of a bank.
Tolerable misstatement as set by the auditor
does not affect any of the four risks.
The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second is that
those errors that occur will not be detected in the auditor’s examination.
An auditor is confronted with an exception considered sufficiently material to warrant some deviation from the standard unqualified auditor’s report. If the exception relates to a departure from generally accepted accounting principles, the auditor must decide between expressing a(n)
adverse opinion and an “except for” opinion.
The audit risk model is
useful in planning, but of limited value in evaluating results.
Research in auditing has shown that if a revised risk is used in the audit risk model to determine a revised planned detection risk, there is a danger of
not increasing the evidence sufficiently.
Which of the following underlies the application of generally accepted auditing standards, particularly the standards of field work and reporting?
The elements of materiality and relative risk.
For a reporting entity that has participated in related-party transactions that are material, disclosure in the financial statements should include
the nature of the relationship and the terms and manner of settlement.