A) Multiple-Choice Questions? the oentsgion or missatement of infoemation, thea that infoutmatiod is, by defirition of FASB Staternent No. 2. a. thaterial. b. insignificant. c. Stgmificant. d. relevant. 2. The preliminary judgment about materiality is the _.. amount by whoch the axditor believes the statements could be misstated and stall not affect the decinions of reasonable asers. a. minimum b. maximam c. mean average d. median average 3. When auditors allocate the preliminary judgment about matcriatity to account bellmcen, the materiality allocated to any given accoumt balance is referrod to in SAS No. 39 as a. the materiality range. b. the erroc range. c. tolerable materiality. d. tolerable misstatement. 4. Why do auditors establish a prelituinary judgrnent abott materiality? a. To help the auditor plan the approptiale evidence to accumulate. b. So that the elient can know what records to make avalable to the acditor. c. To determine what level of staffing (i.e. work experience) is reuired foe the audit. d. None of the above. S. If an auditor establishes a relatively low level for materiality, then the asditor wtill a. accumulate more evidence than if a higher level had becn set. b. accumulate less evidence than if a higher level had becn sec. c. accumulate approximately the same evidence as would te the case were a higher level see. d. accumulate an undetemnined amount of evidenoc. 6. In an audit area that has a higher inherent risk, it woald be pradeat to a. increase the amount of atudit evidence gathered. b. assign more experienced staff to that asca. c. review the completed audit files more thoroughty. d. do all of the above. 7. Which of the following statements regarding inherent risk is correct? a. The inherent risk assigned in the audit risk model is unatifected by the auditor's experience with client's organization. b. Most asditors set a low inherent risk in the first year of an asdit and increase it if experience shows that it was ircorrect. c. Most auditors sct a high inherent nisk in the first year of an ardit and reduce it in subsequent years as they gain experience, even when there is inherenl risk. d. The inherent risk assigncd in the audit risk model is dependent upon the strengths in client's intermal control system. 8. The five steps in applytis mareridity are linteal below is tmabon ceser 1. Estinase the coenatned nainstyeriality ate 2. Betinate the total misitatement in the ocgrent. 3. Set prelininary judgenent about materiality. 4. Allocate preinaitary judgulent about muteriality be segmente. The corrett sequence from start to finish wyould be a. 12543 b. 34215 . c. 43152 d) 51324. 9. Which of the following ratements is not correct? a. Materiality is a relative ratber than an abseluec coscept b. Normally, the nost importunt bave wed an the criterion for decijits materiality ia total sesect. c. Qualitative factors as well as quatetitotive factors affect materialify. d. Given equal dollar amoants, frats are usually coesidered more inportant than ervec. 10. Allocating the preliminary jodgment about materiality to segnenta of the financial statenicuts is necessary because a. evidence is accumulatod foe the financial itasemicnts as a whole so the materiality doesa't apply to them. b. evidence it aceumulated by segments rather than for the finascial atatenetits as a whole. c. it is requited by the AICPA's Code of Professiortal Conduct. d. it is required by the SICC. 11. Regardess of how the allocatien of the preliminary judemerat aboet muteriality was doee, when the audit is complete the auditce mast be confident that the combibed caron in all accocets are a. Jess than the preliminary jodement. b. equal to the preliminary jocgment. c. mote than the preliminary judgrnent. d. less than or equal to the peelieninary jodghent. 12. In situations in which the auditor believes the chance of financial filiere or lons is high, and there is a corregponding increase in client business ritk for the audator, acceptalle adit ritk abould 3. be redoced. b. be inercised. c. remain the same. d. be caleulated using a computerixed statistical package. 13. When dircussing inherent risk (IR) aed the audit risk model, whicti of the following is not true? a) IR is inversely related to planned detection risk: b) IR is iavertely related to evidence. c) IR is the susceptibility of the financial statements to muterial error, axparning no intemal controbs. d) IR is the auditor's assesment of the likelihood that errors exceeding a tolenable amount exis in a segment before considering the effectiveness of iniemal accountimg controls. B) True or False Questions: 1. The auditor's preliminary judgnsent about materiality is the maimam azmount by which the aalites believes the financial statements could be misstated and will not affect the decisions of reasonible 2. The primary purpose of allocating the preliminary judgnent about museriality to fituancial statanent accoants is to help the auditor decide the appropriate evidenoe to accuanulate foe each accouat. 3. If an auditor believes the client will have financial difficulties afler the audit report is issued, and external users will be relying heovily on the financial statements, the a0ditor will probably set accepcable asdit ritk as high. 4. If the preliminary judgnent of matenality increases, the amount of audit evidence required will abo increase. 5. If an auditor assigns a tolerible misstatement of 51,000 to accounts paysble, he cr she would necd to obtain more audit evidence for that account than if $100,000 had beca assigned. engagenenth? a. To enuble proper on-the-job traning of employees. b. To enahle the asditor to obtain sufficient counpetent evidence c. To avoid misundersandings with the client. d. To help keep audit costs reasonable. 2. A meastre of how willing the avditor is to accept that the financial stateinects may be materially misstated mier the audit is completed and an unqualified opinion has been issoed is the a. inherent risk. b. acceptable audit risk. c. statistical risk. d. financial risk. 3. A measure of the auditod's assessment of the likelibood that there are material misstatements in an account before considering the effectiveness of the client's internal control is a. control risk. b. acceptable atudit risk, c. Statistical rick. d. inherent risk. 4. Which of the following is not typically included in initial audit planning? a. Client acceptance/contimuation decisions. b. Determination of the purpose of the audit. c. Schedule engagement staff and andit specialists. d. Perform preliminary analytical procedures. 5. Which of the following factors explains the increased impottance of undersiandinge the client's busincss? a. Expansion of operations to have a global reach. b. Increased connectedness of clients with their suppliers and customers via information technology. c. Increased importance of human capital and other intangible assets. d. All of the above- 6- An understanding of a client's external environment includes a. general economic conditions. b. the extent of competition within the industry. c. regulatory requirements, d. all of the above- 7.-A tour of the client's. facilities is helpful in obtaining an understanding of the client's operations because 3. the auditor will be able to assess the physical safeguards over assets. b. the auditor may be better able to assess certain inherent risks. c. the auditor obtains a broader perspective about the comprany as a whole. d. all of the above. 8- Which of the following steps would be least likely to occur in assessing a client's business risk? a. Evaluating management controls. b. Obtaining an understanding of the client's industry. c. Assess risks of material misstatements. d. Allof the above are equally likely to occur. B) True or False Questions: 1. Comporate governance refers to mantagement's operating philosophy and management style. 2. A signifieant purpose of an engagement letter is to establish a clear understanding of the tems of the engagement between the client and the auditor