C no one in particular d the clients management 4

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Unformatted text preview: plan the appropriate audit evidence to accumulate and develop an overall audit strategy. d. To finalize the assessment of control risk. 7. easy b Auditors are _____ to decide on the combined amount of misstatements in the financial statements that they would consider material early in the audit. a. permitted b. required c. not allowed d. strongly encouraged 8. easy b 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. 9. easy d The preliminary judgment about materiality and the amount of audit evidence accumulated are _____ related. a. directly b. indirectly c. not d. inversely 10. easy d After the preliminary judgment about materiality has been established, auditors may: a. not adjust it. b. adjust it downward only. c. adjust it upward only. d. adjust it either downward or upward. 1-161 11. easy c In an audit area that has a lower inherent risk, it would be prudent to: a. increase the amount of audit evidence gathered. b. assign more experienced staff to that area. c. increase the tolerable misstatement for the area. d. expand planning procedures. 12. easy d Which of the following is least likely to be appropriate as the basis for determining the preliminary judgment about materiality in the audit of financial statements? a. Net income before taxes. b. Current assets. c. Owners’ equity. d. Inventory. 13. easy c 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 14. easy d Amounts involving fraud are usually considered _____ important than unintentional errors of equal dollar amounts. a. less b. no less c. no more d. more 15. easy a Which of the following qualitative factors may significantly influence whether an item is deemed to be material? a. b. c. d. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. Yes No Yes No Misstatements that are otherwise immaterial may be material if they affect a trend in earnings Yes No No Yes 16. easy a Auditors generally allocate the preliminary judgment about materiality to the: a. balance sheet only. b. income statement only. c. income statement and balance sheet. d. statement of cash flows. 17. easy c 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. 18. Auditors begin their assessments of inherent risk during audit planning. Which of the following 1-162 easy a would not help in assessing inherent risk during the planning phase? a. Obtaining client’s agreement on the engagement letter. b. Obtaining knowledge about the client’s business and industry. c. Touring the client’s plant and offices. d. Identifying related parties. 19. medium b Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) _____ effect on the balance sheet. a. reduced b. equal c. undetermined d. increased 20. medium b Which of the following is not a correct statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts? a. Auditors expect certain accounts to have more misstatements than others. b. The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence. c. Auditors expect to identify overstatements as well as understatements in the accounts. d. Relative audit costs affect the allocation. 21. medium b What is the primary means of dealing with risk in planning decisions related to audit evidence? a. Selection of more effective tests of details of balances. b. Application of the audit risk model. c. Establishing a lower preliminary judgment about materiality. d. Allocating materiality judgment to segments. 22. medium d The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors: a. guarantee fair presentation of the financial statements. b. act as insurers of the accuracy of the statements. c. certify the material presented in the statements by management. d. base their conclusions about the statements on professional judgment. 23. medium d Inherent risk is...
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