a. Which one of the following statements is correct concerning the concept of materiality?
(1) Materiality is determined by reference to guidelines established by the AICPA.
(2) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
(3) Materiality depends on the nature of an item rather than the dollar amount.
(4) Materiality is a matter of professional judgment.

(4) Materiality is a matter of professional judgment.

b. Which of the following is not correct about materiality?
(1) The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with
accounting standards, whereas other matters are not important.
(2) An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be considered
material to any one of the financial statements.
(3) Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
(4) An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the
financial statements.

(4) An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on thefinancial statements.

c. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on
an entity’s income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is
appropriate to design audit procedures that are expected to detect misstatements that aggregate
(1) $10,000
(2) $15,000
(3) $20,000
(4) $30,000

(1) $10,000

a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material
misstatements in these types of accounts is defined as
(1) audit risk.
(2) detection risk.
(3) sampling risk.
(4) inherent risk.

(1) audit risk.

b. Inherent risk and control risk differ from planned detection risk in that they
(1) arise from the misapplication of auditing procedures.
(2) may be assessed in either quantitative or nonquantitative terms.
(3) exist independently of the financial statement audit.
(4) can be changed at the auditor’s discretion.

(1) arise from the misapplication of auditing procedures.

c. Which of the following best describes the element of inherent risk that underlies the application of auditing standards?
(1) Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.
(2) Intercompany transactions are usually subject to less detailed scrutiny than arm’s-length transactions with outside parties.
(3) Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a
public utility.
(4) The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts.

(1) Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.

a. As the acceptable level of detection risk decreases, an auditor may
(1) reduce substantive testing by relying on the assessments of inherent risk and control risk.
(2) postpone the planned timing of substantive tests from interim dates to the year-end.
(3) eliminate the assessed level of inherent risk from consideration as a planning factor.
(4) lower the assessed level of control risk from the maximum level to below the maximum.

(2) postpone the planned timing of substantive tests from interim dates to the year-end.

b. As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to
(1) find smaller misstatements.
(2) find larger misstatements.
(3) increase the tolerable misstatement in the accounts.
(4) increase materiality in the accounts.

(3) increase the tolerable misstatement in the accounts.

c. Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned.
To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor could
(1) decrease detection risk.
(2) increase materiality levels.
(3) decrease substantive testing.
(4) increase inherent risk.