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Study Guide Questions on Auditing

1) In planning the audit, the auditor should assess materiality at which two levels?

a. the preliminary level and the final level.
b. the company level and the divisional level.
c. the account balance level and the detailed item level.
d. the financial statement level and the account balance level.
e. the account balance level and the transaction level.

2) Materiality at the account balance level is stated in planning an audit because:

a. some users make decisions based upon individual account balances.
b. the auditor verifies account balances in reaching an overall conclusion on the fairness of the financial statements.
c. the opinion on the fairness of the financial statements extends to the individual account balances.
d. official pronouncements have specified different levels of materiality for various financial statement items.
e. the opinion on the fairness of the financial statements extends to the individual transactions.

3) In making a preliminary judgments about materiality, the auditor initially determines the aggregate (overall) level of materiality for each statement. For planning purposes, the auditor should use the:

a. levels separately.
b. level he or she judges to be the more reliable.
c. average of these levels
d. largest aggregate level
e. smallest aggregate level.

4) Quantitative guidelines for setting materiality levels are currently provided by:

a. neither GAAP nor GAAS.
b. GAAP.
c. GAAS.
d. both GAAP and GAAS
e. the AICPA.

5) Professional standards recognize that a misstatement that is quantitatively immaterial may be qualitatively material. In regard to these items, professional standards require the auditor to:

a. plan the audit to search for them.
b. design explicit procedures to detect them.
c. be on the alert for them.
d. report them to the audit committee.
e. report them directly to client management.

6) "Tolerable misstatement" is the termed used to indicate materiality at the:

a. balance sheet level.
b. account balance level.
c. income statement level.
d. company-wide level.
e. transactions level.

7) The six steps involved in performing analytical procedures does not include:

a. developing an expectation range.
b. analyzing data and identify significant differences.
c. performing the calculations using industry data.
d. Investigating significant unexpected differences.
e. identifying calculations and comparisons to be made.

8) In making judgments about materiality at the account balance level, the auditor must consider the relationship between it and financial statement materiality. This should lead the auditor to plan the audit to detect misstatements that:

a. are individually material to the statements taken as a whole.
b. are individually immaterial to the statements taken as a whole.
c. may be immaterial individually, but may aggregate with misstatements in other accounts to a material level.
d. bring the cumulative total of known misstatements to the level of materiality established by management.
e. are individually material to the account balance.

9) In allocating financial statement materiality to the various accounts, the auditor should consider

a. the likelihood of misstatements in the account.
b. the probable cost of verifying the account.
c. neither the likelihood of misstatements in the account nor the probable cost of verifying the account.
d. both the likelihood of misstatements in the account and the probable cost of verifying the account.
e. the likelihood of misstatements in a transaction.

10) The auditor will allocate more materiality to accounts with a(n):

a. high chance of misstatements and that are difficult to audit.
b. high chance of misstatements but that are easy to audit.
c. low chance of misstatements but that are difficult to audit.
d. low chance of misstatements and that are easy to audit.
e. average chance of misstatements and that are easy to audit.

11) All else being equal, as the level of materiality decreases, the amount of evidence required will:

a. remain the same.
b. increase.
c. decrease.
d. change in an unpredictable fashion.
e. fluctuate randomly.

12) In general, as an account balance decreases, the amount of evidence required will:

a. remain the same.
b. increase.
c. decrease.
d. change in an unpredictable fashion.
e. fluctuate randomly.

13) Numerous factors influence the effectiveness of analytical procedures. Which of the following factors would tend to make analytical procedures less effective?

a. Relationships that are dynamic.
b. Precise models.
c. Reliable systems of internal controls.
d. A variety of sources.
e. Assertion specific procedures.

14) Which of the following rations is not considered to be a key measure of profitability?.

a. Asset turnover
b. Inventory turnover.
c. Return on assets.
d. Capital structure leverage.
e. Return on equity.

15) Which key financial ratio is defined as the estimate of the number of days from the time a company purchases inventory, sells it, and collects the receivable?

a. Inventory turnover.
b. Accounts receivable turnover.
c. Gross operating cycle.
d. Net operating cycle.
e. Accounts payable turnover.

Solution Preview

1) In planning the audit, the auditor should assess materiality at which two levels?
d. the financial statement level and the account balance level. The financial statement level is always an assessment for materiality, it is basically what the entire audit was based upon.

2) Materiality at the account balance level is stated in planning an audit because:
b. the auditor verifies account balances in reaching an overall conclusion on the fairness of the financial statements. This is correct. If the account balances are inaccurate, the entire audit is skewed.

3) In making a preliminary judgments about materiality, the auditor initially determines the aggregate (overall) level of materiality for each statement. For planning purposes, the auditor should use the:
e. smallest aggregate level. The auditor always uses the smallest level.

4) Quantitative guidelines for setting materiality levels are currently provided by:
a. neither GAAP nor GAAS. None, actually. The FASB would be the ones to issue materiality levels through an FSAS, but they have never done so because materiality is different ...

Solution Summary

This solution provides the correct answers and explanations to the multiple choice questions listed.

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