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Audit planning discussions

Four multiple questions related to auditing.

1. 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 statement?

a. Net income before taxes.
b. Current assets
c. Owners' equity
d. Inventory

2. Which of the following statements regarding inherent risk is correct?

a. The inherent risk assigned in the audit risk model is unaffected by the auditor's experience with client's organization.
b. Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect.
c. 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.
d. The inherent risk assigned in the audit risk model is dependent upon the strengths in client's internal control system.

3. When a different extent of evidence is needed for the various cycles. The difference is caused by

a. Errors in the client's accounting system
b. Client's need to achieve an unqualified opinion.
c. The auditor's need to follow GAAS.
d. The auditor's expectations of errors and assessment of the control structure.

4. Inherent risk is reduced where the likelihood of defalcations is low.
This would be true for an account such as

a. inventory
b. marketable securities
c. cash
d. accounts receivable

Solution Preview

1. Materiality thresholds are determined by the effects a material item may have on the income statement or balance sheet. Since every error affects the income statement and/or the balance sheet, it becomes the cutoff point expressed in dollars below ...

Solution Summary

The solution discusses various aspects of risk and materiality when planning for an audit.

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