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1 Copyright © 2014 Pearson Education, Inc. Auditing and Assurance Services, 15e (Arens) Chapter 9 Materiality and Risk Learning Objective 9-1 1) If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2: A) material. B) insignificant. C) significant. D) relevant. Answer: A Terms: FASB Statement No. 2; Probable judgment of a
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  1 Copyright © 2014 Pearson Education, Inc. Auditing and Assurance Services, 15e (Arens) Chapter 9 Materiality and Risk Learning Objective 9-1 1) If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information, then that information is, by definition of FASB Statement No. 2: A) material. B) insignificant. C) significant. D) relevant. Answer: A Terms: FASB Statement No. 2; Probable judgment of a reasonable person Diff: Easy Objective: LO 9-1 AACSB: Reflective thinking skills 2) The scope paragraph of the standard unqualified auditor's report states that … the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement. What type of assurance is given? A) Immediate B) Limited C) Reasonable D) Absolute Answer: C Terms: Type of assurance provided Diff: Easy Objective: LO 9-1 AACSB: Reflective thinking skills 3) Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of: A) regulators. B) the audit firm's managing partner. C) the client shareholders. D) the client. Answer: D Terms: Discovery of a material misstatement must bring it to the attention Diff: Easy Objective: LO 9-1 AACSB: Reflective thinking skills  2 Copyright © 2014 Pearson Education, Inc. 4) Determining materiality requires professional judgment. A) True B) False Answer: A Terms: Materiality Diff: Easy Objective: LO 9-1 AACSB: Reflective thinking skills Learning Objective 9-2 1) Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. A) I only B) II only C) both I and II D) neither are true Answer: C Terms: Preliminary materiality assessment Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills 2) Why do auditors establish a preliminary judgment about materiality? A) To determine the appropriate level of staff to assign to the audit B) So that the client can know what records to make available to the auditor C) To help plan the appropriate evidence to accumulate D) To finalize the control risk assessment Answer: C Terms: Purpose to establish preliminary judgment about materiality Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills 3) If an auditor establishes a relatively high level for materiality, then the auditor will: A) accumulate more evidence than if a lower level had been set. B) accumulate less evidence than if a lower level had been set. C) accumulate approximately the same evidence as would be the case were materiality lower. D) accumulate an undetermined amount of evidence. Answer: B Terms: High level for materiality Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills  3 Copyright © 2014 Pearson Education, Inc. 4) The preliminary judgment about materiality and the amount of audit evidence accumulated are  ________ related. A) directly B) indirectly C) not D) inversely Answer: D Terms: Preliminary judgment about materiality and amount of evidence accumulated Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills 5) Which of the following is the primary basis used to decide materiality for a for-profit entity? A) Net sales B) Net assets C) Net income before tax D) All of the above Answer: C Terms: Primary basis to decide materiality for a for-profit entity Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills 6) Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. A) permit B) do not allow C) require D) strongly encourage Answer: C Terms: Auditing standards; Preliminary judgment about materiality documented Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills 7) Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts. A) less B) no less C) no more D) more Answer: D Terms: Amounts involving fraud Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills  4 Copyright © 2014 Pearson Education, Inc. 8) Qualitative factors can affect an auditor's assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. A) I only B) II only C) I and II D) neither I nor II Answer: C Terms: Qualitative factors can affect auditor's assessment of materiality Diff: Easy Objective: LO 9-2 AACSB: Reflective thinking skills 9) 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 materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be: A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4 Answer: B Terms: Five steps in applying materiality Diff: Moderate Objective: LO 9-2 AACSB: Reflective thinking skills 10) Which of the following statements is not  correct? A) Materiality is a relative rather than an absolute concept. B) The most important base used as the criterion for deciding materiality is total assets. C) Qualitative factors as well as quantitative factors affect materiality. D) Given equal dollar amounts, frauds are usually considered more important than errors. Answer: B Terms: Materiality Diff: Moderate Objective: LO 9-2 AACSB: Reflective thinking skills
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