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ch06 - Chapter 6 Multiple Choice 6-1 C 6-2 B 6-3 D 6-4 B...

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Chapter 6 Multiple Choice 6-1. C 6-2. B 6-3. D 6-4. B 6-5. D 6-6. B 6-7. C 6-8. B 6-9. A 6-10. D 6-11. A 6-12. B 6-13. C 6-14. D 6-15. C 6-16. C 6-17. A 6-18. C 6-19. D 6-20. C 6-21. C 6-22. C Discussion Questions 6-23 [LO 3] Why do the audit standards address qualifications of the user of financial statements in the discussion of materiality? Answer: Because materiality involves qualitative as well as quantitative decisions. 6-24 [LO 4] Why is fraud that is committed by management always considered material, even if the amount is not quantitatively material? Answer: The main reason management fraud is considered material regardless of the amount is because of the concerns it raises regarding management integrity. Even if the one identified fraud is of a small dollar magnitude, it raises the question of whether management has been honest about all of the other items in the financial statements that 1
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are vulnerable to management influence and that could cause the overall financial statements to be misstated. 6-25 [LO 1] What is a top down approach to planning an audit? What are the steps? How does this approach link the financial statements to ultimate audit program steps? Why does AS 5 direct the auditor to use this approach in assessing materiality? Answer: A top down approach is intended to maximize audit efficiency by focusing the auditor’s attention on those items that are actually important to the audit. The steps are as follows: Determine materiality at the financial statement level. Based on that, identify those accounts and disclosures that are important enough that, either alone or when aggregated, could cause the financial statements to be materially misstated. Decide which assertions are relevant to the important accounts and disclosures. For the financial statement audit, the auditor then plans and executes audit procedures to evaluate the relevant assertions for the important accounts and disclosures. For the ICFR audit: The auditor determines what could go wrong to impair the validity of management’s assertions for the important accountants and disclosures. The auditor evaluates whether management has constructed controls that may be effective in preventing or detecting the identified problems. If controls are in place the auditor designs and executes procedures to test whether those controls that are targeted at the problems that could occur in the assertions for important accounts and disclosures actually operate effectively. The top down approach begins with the important financial statement assertions and ends with the specific financial statement audit and ICFR audit procedures, thus creating a linkage. The ICFR audit instructs this approach to be sure that the auditor addresses all of the important risks to the financial statement fairness, but does not waste audit effort on those that are not important.
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