CHAPTER 9

Multiple-Choice Questions

1. If it is probable that the judgment of a reasonable person would have been changed or
easy 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.

2. The preliminary judgment about materiality is the amount by which the auditor
easy believes the statements could be misstated and still not affect the decisions of reasonable
users.
a. minimum
b. maximum
c. mean average
d. median average

3. When auditors allocate the preliminary judgment about materiality to account balances, the
easy materiality allocated to any given account balance is referred to in SAS No. 39 as
a. the materiality range.
b. the error range.
c. tolerable materiality.
d. tolerable misstatement.

4. Why do auditors establish a preliminary judgment about materiality?

easy a. To help the auditor plan the appropriate evidence to accumulate.
a b. So that the client can know what records to make available to the auditor.
c. To determine what level of staffing (i.e., work experience) is required for the audit.
d. None of the above.

5. If an auditor establishes a relatively low level for materiality, then the auditor will
easy a. accumulate more evidence than if a higher level had been set.
b. accumulate less evidence than if a higher level had been set.
c. accumulate approximately the same evidence as would be the case were a higher level
set.
d. accumulate an undetermined amount of evidence.

6. After the preliminary judgment about materiality has been established, auditors may
easy a. not adjust it.
b. adjust it downward only.
c. adjust it upward only.
d. adjust it either downward or upward.

7. In an audit area that has a higher inherent risk, it would be prudent to

easy a. increase the amount of audit evidence gathered.
b. assign more experienced staff to that area.
c. review the completed audit files more thoroughly.
d. do all of the above.

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8. Which of the following is least likely to be appropriate as the basis for determining the
easy preliminary judgment about materiality in the audit of a set of financial statements?
a. Net income before taxes.
b. Current assets.
c. Owners’ equity.
d. Inventory.

9. Which of the following might not be a signal of a lack of integrity in management?

easy a. Prior criminal conviction of an assembly line foreman.
b. Frequent turnover of key internal audit personnel.
c. Frequent disagreements with previous auditors.
d. Frequent turnover of key financial personnel.

10. Which of the following qualitative factors may significantly influence whether an item is
easy deemed to be material?
a. Misstatements that are otherwise minor may be material if there are possible
consequences arising from contractual obligations.
b. Misstatements that are otherwise immaterial may be material if they affect a trend in
earnings.
c. Amounts involving fraud are usually considered more important than unintentional
errors of equal dollar amounts.
d. All of the above may influence materiality.

11. Auditors generally allocate the preliminary judgment about materiality to

easy a. the balance sheet only.
b. the income statement only.
c. the income statement and balance sheet.
d. the statement of cash flows.

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

easy 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.

13. Auditors begin their assessments of inherent risk during the planning phase. Which of the
easy following would not be a topic of the planning phase that would also help to assess inherent
risk?
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.

14. Which of the following is not a difficulty associated with allocating the preliminary judgment
medium about materiality to balance sheet accounts?
a. Auditors expect certain accounts to have more misstatements than others.
b. The allocation can have a significant effect on audit costs.
c. The auditor can expect to identify overstatements as well as understatements in the
accounts.
d. All of the above are difficulties associated with the allocation of materiality.

15. What is the primary means of dealing with risk in planning audit evidence?

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medium a. Selection of more effective tests of details of balances.
b. Application of the audit risk model.
c. Establish a lower preliminary judgment about materiality.
d. All of the above.

16. The opinion paragraph in auditors’ reports includes two important phrases that are directly
medium related to materiality and risk. The phrases are
a. “in our opinion” and “in all material respects.”
b. “presents fairly” and “in all material respects.”
c. “in our opinion” and “presents fairly.”
d. “in all material respects” and “reasonable assurance.”

17. The phrase “in our opinion” in the auditor’s report is intended to inform users that auditors
medium 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.

18. Inherent risk is _______ related to detection risk and _______ related to the amount of audit
medium evidence.
a. directly, inversely.
b. directly, directly.
c. inversely, inversely.
d. inversely, directly.

19. The five steps in applying materiality are listed below in random order.
medium 1. Estimate the combined misstatement.
2. Estimate the total misstatement in the segment.
3. Set preliminary judgment about materiality.
4. Allocate preliminary judgment about materiality to segments.
5. Compare combined estimate with preliminary judgment about materiality.
The correct sequence from start to finish would be
a. 1 2 5 4 3.
b. 3 4 2 1 5.
c. 4 3 1 5 2.
d. 5 1 3 2 4.

20. SAS No. 47 defines the preliminary judgment about materiality as the combined amount of
medium misstatements in the financial statements that would be considered material. This judgment
a. need not be quantified.
b. must be quantified.
c. must be quantified in terms of dollars.
d. must be quantified in terms of both dollars and of a percentage of sales.

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