Chapter 9

Multiple-Choice Questions

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

easy changed or influenced by the omission or misstatement of information, then
a 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

easy which the auditor believes the statements could be misstated and still not
affect the decisions of reasonable users.
b a. minimum
b. maximum
c. mean average
d. median average

3. Auditors are responsible for determining whether financial statements are

easy materially misstated, so upon discovering a material misstatement they
must bring it to the attention of:
d a. regulators.
b. the audit firm’s managing partner.
c. no one in particular.
d. the client’s management.

4. The FASB definition of materiality emphasizes what class of financial

statement users?
easy a. Regulators.
c b. Informed investors.
c. Reasonable persons.
d. Potential investors.

5. When auditors allocate the preliminary judgment about materiality to

easy account balances, the materiality allocated to any given account balance is
referred to as:
d a. the materiality range.
b. the error range.
c. tolerable materiality.
d. tolerable misstatement.

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

easy a. To determine the appropriate level of audit experience required for the
work.
c b. So that the client can know what records to make available to the
auditor.
c. To plan the appropriate audit evidence to accumulate and develop an
overall audit strategy.
d. To finalize the assessment of control risk.

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7. Auditors are _____ to decide on the combined amount of misstatements in
easy the financial statements that they would consider material early in the audit.
b a. permitted
b. required
c. not allowed
d. strongly encouraged

8. If an auditor establishes a relatively high level for materiality, then the

auditor will:
easy a. accumulate more evidence than if a lower level had been set.
b 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. The preliminary judgment about materiality and the amount of audit

easy evidence accumulated are _____ related.
d a. directly
b. indirectly
c. not
d. inversely

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

11. In an audit area that has a lower inherent risk, it would be prudent to:
easy a. increase the amount of audit evidence gathered.
c b. assign more experienced staff to that area.
c. increase the tolerable misstatement for the area.
d. expand planning procedures.

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

13. Auditing standards _____ that the basis used to determine the preliminary
easy judgment about materiality be documented in the audit files.
c a. permit
b. do not allow
c. require
d. strongly encourage

14. Amounts involving fraud are usually considered _____ important than
easy unintentional errors of equal dollar amounts.
d a. less
b. no less
c. no more
d. more
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15. Which of the following qualitative factors may significantly influence whether
easy an item is deemed to be material?
a
Misstatements that are
otherwise minor may be Misstatements that are otherwise
material if there are possible immaterial may be material if they
consequences arising from affect a trend in earnings
contractual obligations.
a. Yes Yes
b. No No
c. Yes No
d. No Yes

16. Auditors generally allocate the preliminary judgment about materiality to

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

17. 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
c 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.
easy Which of the following would not help in assessing inherent risk during the
planning phase?
a 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. Auditors commonly allocate materiality to balance sheet accounts rather

medium than income statement accounts because most income statement
b misstatements have a(n) _____ effect on the balance sheet.
a. reduced
b. equal
c. undetermined
d. increased

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20. Which of the following is not a correct statement regarding the allocation of
medium the preliminary judgment about materiality to balance sheet accounts?
b 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. What is the primary means of dealing with risk in planning decisions related
to audit evidence?
medium a. Selection of more effective tests of details of balances.
b b. Application of the audit risk model.
c. Establishing a lower preliminary judgment about materiality.
d. Allocating materiality judgment to segments.

22. 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.
d 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. Inherent risk is _______ related to detection risk and _______ related to the
medium amount of audit evidence.
d a. directly, inversely
b. directly, directly
c. inversely, inversely
d. inversely, directly

24. The five steps in applying materiality are listed below in random order.
medium 1. Estimate the combined misstatement.
b 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.

25. Which of the following statements is not correct?

medium a. Materiality is a relative rather than an absolute concept.
b b. The most important base used as the criterion for deciding materiality is
total assets.
c. Qualitative factors as well as quantitative factors affect materiality.
d. Given equal dollar amounts, frauds are usually considered more
important than errors.

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26. Since materiality is relative, it is necessary to have bases for establishing
medium whether misstatements are material. Normally, the most common base for
deciding materiality is:
a a. net income before taxes.
b. net working capital.
c. net income after taxes.
d. total assets.

27. Certain types of misstatements are likely to be more important than other
medium types to users, even if the dollar amounts are the same. Which of the
following demonstrates this?
a
Amounts involving frauds are Misstatements that are otherwise
considered more important immaterial may be material if they
than errors of equal amount affect a trend in earnings.
a. Yes Yes
b. No No
c. Yes No
d. No Yes

28. Allocating the preliminary judgment about materiality to financial statements

medium segments is necessary because:
b a. evidence is accumulated for the financial statements as a whole so
materiality does not apply to them.
b. evidence is accumulated by segments rather than for the financial
statements as a whole.
c. it is required by the AICPA’s Code of Professional Conduct.
d. it is required by the SEC.

29. Which of the following statements is not correct?

medium a. Either an overstatement of an asset account or an understatement of a
c liability account would have the same effect on the income statement.
b. A misclassification in the balance sheet will have no effect on operating
income.
c. Either an overstatement of an asset account or an overstatement of a
liability account would have the same effect on the income statement.
d. Either an understatement of an asset account or an overstatement of a
liability account would have the same effect on the income statement.

30. Regardless of how the preliminary judgment about materiality is allocated,

medium the auditor must be confident that total combined misstatements in all
accounts are:
d a. less than the preliminary judgment.
b. equal to the preliminary judgment.
c. more than the preliminary judgment.
d. less than or equal to the preliminary judgment.

31. Auditors frequently refer to the terms audit assurance, overall assurance,
medium and level of assurance to refer to ________.
c a. detection risk
b. audit report risk
c. acceptable audit risk
d. inherent risk

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32. _____ misstatements are those where the auditor can determine the
medium amount of the misstatement in the account.
c a. Potential
b. Likely
c. Known
d. Projected
33. When a different extent of evidence is needed for the various cycles, the
difference is caused by:
medium a. errors in the client’s accounting system.
d b. a client’s need to achieve an unqualified opinion.
c. an auditor’s need to follow auditing standards.
d. an auditor’s expectations of errors and assessment of internal control.

34. If planned detection risk is reduced, the amount of evidence the auditor
accumulates will:
medium a. increase.
a b. decrease.
c. remain unchanged.
d. be indeterminate.

35. Likely misstatements can result from:

Medium
a Projections of
Differences between misstatements
Computation of the management’s and an based on an
sampling error for auditor’s judgment auditor’s tests of a
the cash account about account sample from a
balances population
a. No Yes Yes
b. Yes Yes No
c. No No Yes
d. Yes No No

36. When discussing control risk (CR) and the audit risk model, which of the
following is false?
medium a. CR is a measure of the auditor’s assessment of the likelihood that
b misstatements will not be prevented or detected by internal control.
b. If the auditor concludes that internal control is completely ineffective to
prevent or detect errors, he/she would assign a low value (e.g., 0%) to
CR.
c. The relationship between control risk and detection risk is inverse.
d. The relationship between control risk and evidence needed to support
account balances is direct.

37. Which of the following is not a good indicator of the degree to which
medium statements are relied on by external users?
d a. Client’s size, as measured by total assets or total revenue.
b. Distribution of ownership among the public.
c. Nature and amount of liabilities.
d. Amount of net income or loss after taxes.

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38. If an auditor believes the chance of financial failure is high and there is a
medium corresponding increase in business risk for the auditor, acceptable audit
risk would likely:
a a. be reduced.
b. be increased.
c. remain the same.
d. be calculated using a computerized statistical package.

39. When management has an adequate level of integrity for the auditor to
medium accept the engagement but cannot be regarded as completely honest in all
dealings, auditors normally:
a a. reduce acceptable audit risk and increase inherent risk.
b. reduce inherent risk and control risk.
c. increase inherent risk and control risk.
d. increase acceptable audit risk and reduce inherent risk.

40. One accounting issue that does not require management to use significant
judgments is:
medium a. the allowance for doubtful accounts.
b b. the useful life of equipment for tax purposes.
c. obsolete inventory.
d. the liability for warranty payments.

41. Inherent risk is often low for an account such as:

medium a. inventory.
d b. marketable securities.
c. cash.
d. accounts receivable.

42. The auditor typically does not assess control risk and inherent risk for:
medium a. each audit objective.
d b. each cycle.
c. each account.
d. the overall audit.

43. (Public) To what extent do auditors typically rely on internal controls of their public
company clients?
medium a. Extensively
a b. Only very little
c. Infrequently
d. Never

44. Auditors typically rely on internal controls of their private company clients:
medium a. Only as needed to complete the audit and satisfy Sarbanes-Oxley
requirements.
b b. Only if the controls are determined to be effective.
c. Only if the client asks an auditor to test controls.
d. Only if the controls are sufficient to increase Control Risk to an
acceptable level.

45. Acceptable audit risk is ordinarily set by the auditor during planning and:
medium a. held constant for each major cycle and account.
a b. held constant for each major cycle but varies by account.
c. varies by each major cycle and by each account.
d. varies by each major cycle but is constant by account.

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46. When the auditor is attempting to determine the extent to which external
medium users rely on a client’s financial statements, they may consider several
factors except for:
d a. client size.
b. concentration of ownership.
c. types and amounts of liabilities.
d. assessment of detection risk.

47. A major difficulty in the application of the audit risk model is:
medium a. defining the terms of the model.
b b. measuring the components of the model.
c. understanding the effect on other factors in the model when one factor
is changed.
d. the failure of the Audit Standards Board to accept it and incorporate it
into standards.

48. When setting a preliminary judgment about materiality:

medium a. more evidence is required for a low dollar amount than for a high dollar
amount.
a b. less evidence is required for a low dollar amount than for a high dollar
amount.
c. the same amount of evidence is required for either low or high dollar
amounts.
d. there is no relationship between it and the dollar amount of evidence
needed.

49. When allocating materiality, most practitioners choose to allocate to:

challenging a. the income statement accounts because they are more important.
b b. the balance sheet accounts because there are fewer.
c. both balance sheet and income statement accounts because there
could be errors on either.
d. all of the financial statements because there could be errors on other
statements besides the income statement and balance sheet.

50. The risk of material misstatement refers to:

challenging a. control risk and acceptable audit risk.
c b. inherent risk.
c. the combination of inherent risk and control risk.
d. inherent risk and audit risk.

51. Auditors may assess inherent risk and control risk:

medium Jointly to determine the Separately and combine their effects

a risk of material in the audit risk model
misstatement
a. Yes Yes
b. No No
c. Yes No
d. No Yes

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52. Which one of the following statements about the cycle approach to auditing
is not correct?
challenging a. There are differences among cycles in the frequency and size of
expected errors.
c b. There are differences among cycles in the effectiveness of internal
controls.
c. There are differences among cycles on the auditor’s willingness to
accept risk that material errors exist after the auditing is complete.
d. It is common for auditors to want an equally low likelihood of errors for
each cycle after the auditor is finished.

53. When the auditor has the same level of willingness to risk that material
challenging misstatements will exist after the audit is finished for all financial statement
cycles:
a a. a different extent of evidence will likely be needed for various cycles.
b. the same amount of evidence will be gathered for each cycle.
c. the auditor has not followed generally accepted auditing standards.
d. the level for each cycle must be no more than 2% so that the entire
audit does not exceed 10%.

54. Which of the following statements is not true?

challenging a. Inherent risk is inversely related to detection risk.
b b. Inherent risk is inversely related to evidence.
c. Inherent risk is the susceptibility of the financial statements to material
error, assuming no internal controls.
d. Inherent risk is the auditor’s assessment of the likelihood that errors
exceeding a tolerable amount exist in a segment before considering the
effectiveness of internal controls.

55. Which of the following is not a primary consideration when assessing

inherent risk?
challenging a. Nature of client’s business.
c b. Existence of related parties.
c. Frequency and intensity of management’s review of accounting
transactions and records.
d. Susceptibility to defalcation.

56. Which of the following is an example of the concept of inherent risk?

challenging a. Humans make more errors than computers; therefore, a manual
c accounting system is riskier than a computerized system.
b. Accounting systems with vouchers have many more controls built in, so
the risk that there will be errors on the financial statements is reduced.
c. Loans receivable for a finance company are less likely to be collectible
than those of a bank.
d. Audits with larger sample sizes are less risky than those with smaller
sample sizes.

57. Tolerable misstatement as set by the auditor:

challenging a. decreases acceptable audit risk.
d b. increases inherent risk and control risk.
c. affects planned detection risk.
d. does not affect any of the four risks.

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58. Which of the following underlies the application of generally accepted
challenging auditing standards, particularly the standards of fieldwork and reporting?
a a. The elements of materiality and relative risk.
b. The element of internal control.
c. The element of corroborating evidence.
d. The element of reasonable assurance.

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Essay Questions

59. Discuss the three main factors that affect an auditor’s preliminary judgment
medium about materiality.

Answer:
The three main factors that affect an auditor’s judgment about
materiality are:
• Materiality is a relative rather than an absolute concept. A
misstatement of a given size might be material for a small company,
whereas the same dollar misstatement could be immaterial for a
larger one.
• Bases are needed for evaluating materiality. Since materiality is
relative, it is necessary to have bases for establishing whether
misstatements are material. Net income before taxes is normally the
most commonly used base, but other possible bases include current
assets, total assets, current liabilities, and owners’ equity.
• Qualitative factors also affect materiality. Certain types of
misstatements are likely to be more important to users than others,
even if the dollar amounts are the same, such as misstatements
involving frauds.

60. Due to qualitative factors, certain types of misstatements are likely to be

medium more important to users than others, even if the dollar amounts are the
same. Identify two qualitative factors that might significantly affect an
auditor’s materiality judgment, and give an example of each.

Answer:
Qualitative factors that affect an auditor’s materiality judgment include:
• Amounts involving fraud. Amounts involving fraud are usually
considered more important than unintentional errors of equal dollar
amounts because fraud reflects on the honesty and reliability of the
management or other personnel involved. For example, an
intentional misstatement of inventory would be more important to
users than a clerical error in inventory of the same amount.
• Misstatements affecting contractual obligations. Misstatements that
are otherwise minor may be material if there are possible
consequences arising from contractual obligations. For example, if
a misstatement causes a required minimum account balance to
exceed the minimum, when the correct balance is less than the
minimum, this misstatement likely would be important to users.
• Profit vs. loss. Misstatements that cause a loss to be reported as a
profit or misstatements that affect trends in earnings are likely to be
important to users.

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61. Explain why it is necessary to allocate the preliminary judgment about
medium materiality to individual accounts (segments) in the financial statements.
Also explain why allocating to balance sheet accounts is more common
than allocating to income statement accounts.

Answer:
Allocating the preliminary judgment about materiality to individual
accounts is necessary because evidence is accumulated for accounts
rather than for the financial statements as a whole. Allocating to
accounts establishes a tolerable misstatement amount for each
account, which helps the auditor decide the appropriate audit evidence
to accumulate for each account. Most practitioners allocate materiality
to balance sheet accounts rather than income statement accounts
because there are fewer balance sheet than income statement
accounts.

62. Why do most practitioners allocate the preliminary judgment about

medium materiality to balance sheet accounts?
Answer:
Most income statement misstatements have an equal effect on the
balance sheet because of the double-entry bookkeeping system.
Because there are fewer balance sheet accounts than income
statement accounts in most audits and most audit procedures focus on
balance sheet accounts, allocating materiality to balance sheet
accounts is the most appropriate alternative.

63. Discuss how auditors use the audit risk model when planning an audit.
medium
Answer:
The audit risk model is used primarily for planning purposes in deciding
how much evidence to accumulate in each cycle. The auditor decides
an acceptable level of audit risk, assesses inherent risk and control
risk, and then uses the relationship depicted in the following model to
determine an appropriate level for planned detection risk:
PDR = AAR
IR x CR

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64. Describe the audit risk model and each of its components.
medium
Answer:
The planning form of the audit risk model is stated as follows:

PDR = AAR
IR x CR

where: PDR = planned detection risk

AAR = acceptable audit risk
IR = inherent risk
CR = control risk
Planned detection risk is a measure of the risk that audit evidence for
an account will fail to detect misstatements exceeding a tolerable
amount, should such misstatements exist. Planned detection risk
determines the amount of substantive evidence that the auditor plans to
accumulate.
Acceptable audit risk is a measure of how willing the auditor is to
accept that the financial statements may be materially misstated after
the audit is completed and an unqualified opinion has been issued. It is
influenced primarily by the degree to which external users will rely on
the statements, the likelihood that a client will have financial difficulties
after the audit report is issued, and the auditor’s evaluation of
management’s integrity.
Inherent risk is a measure of the auditor’s assessment of the likelihood
that there are material misstatements in an account before considering
the effectiveness of internal control.
Control risk is a measure of the auditor’s assessment of the likelihood
that misstatements exceeding a tolerable amount in an account will not
be prevented or detected by the client’s internal controls.

65. There are several factors that affect an audit firm’s business risk and,
medium therefore, acceptable audit risk. Discuss three of these factors.

Answer:
Business risk and acceptable audit risk are affected by:
• The degree to which external users will rely on the statements. For
large, publicly held clients, business risk is greater, and acceptable
audit risk will be less, than for small, privately held clients, all things
being equal.
• The likelihood that a client will have financial difficulties after the
audit report is issued. Business risk is greater, and acceptable audit
risk will be lower, when the client is experiencing financial
difficulties.
• The auditor’s evaluation of management’s integrity. Business risk is
greater and acceptable audit risk will be lower when the client’s
management has questionable integrity.

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66. Discuss each of the five steps in applying materiality in an audit, and
challenging identify the audit phase(s) in which each step is performed. List these steps
in the order in which they occur.

Answer:
Step 1. Set preliminary judgment about materiality. This is the
combined amount of misstatements in the financial statements that
would be considered material. This decision is made in the planning
stage of the audit.
Step 2. Allocate preliminary judgment about materiality to segments. In
this step, the auditor normally allocates the preliminary judgment about
materiality to the balance sheet accounts. The amount of materiality
allocated to an account is referred to as that account’s tolerable
misstatement. This allocation is performed in the audit planning stage.
Step 3. Estimate total misstatement in segment. In this step, the auditor
projects the sample results to the population. An allowance for
sampling risk is also calculated. This would be performed after the
substantive tests for each account are completed.
Step 4. Estimate the combined misstatement. In this step, the projected
errors for each account are added, along with total sampling error, to
calculate the combined misstatement. This would be performed after all
substantive tests have been completed.
Step 5. Compare combined estimated misstatement with preliminary or
revised judgment about materiality. If the combined estimated
misstatement is less than or equal to the judgment about materiality,
then the auditor concludes the financial statements are fairly presented.
This would be performed after all substantive tests have been
completed, in the final review stage of the audit.

Other Objective Answer Format Questions

67. Below are four situations that involve the audit risk model as it is used for
easy planning audit evidence requirements in the audit of inventory. For each
situation, calculate planned detection risk.

SITUATION

1 2 3 4

Acceptable audit risk 1% 10% 10% 5%

Inherent risk 100% 100% 50% 20%

Control risk 100% 100% 40% 30%

Planned detection risk ______ ______

______ ______

Answer: 1. 1%; 2. 10%; 3. 50%; 4. 83.3%

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68. Using your knowledge of the relationships among acceptable audit risk,
easy inherent risk, control risk, planned detection risk, tolerable misstatement,
and planned evidence, state the effect on planned evidence (increase or
decrease) of changing each of the following factors, while the other factors
remain unchanged.

decrease 1. An increase in acceptable audit risk. .

increase 2. An increase in inherent risk. .
decrease 3. A decrease in control risk. .
decrease 4. An increase in planned detection risk. .
decrease 5. An increase in tolerable misstatement. .

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69. Match nine of the terms (a-i) with the definitions provided below (1-9):
medium
a. Business risk
b. Preliminary judgment about materiality
c. Inherent risk
d. Planned detection risk
e. Audit assurance
f. Acceptable audit risk
g. Tolerable misstatement
h. Control risk
i. Materiality

d 1. A measure of the risk that audit evidence for a segment will fail
to detect misstatements exceeding a tolerable amount, should
such misstatements exist.

a 2. The risk that the auditor or audit firm will suffer harm because
of a client relationship, even though the audit report rendered
for the client was correct.

h 3. A measure of the auditor’s assessment of the likelihood that

misstatements exceeding a tolerable amount in a segment will
not be prevented or detected by the client’s internal controls.

f 4. A measure of how much risk the auditor is willing to take that

the financial statements may be materially misstated after the
audit is completed and an unqualified audit opinion has been
issued.

g 5. The materiality allocated to any given account balance.

b 6. The maximum amount by which the auditor believes that the

statements could be misstated and still not affect the decisions
of reasonable users.

e 7. This term is synonymous with acceptable audit risk.

i 8. The magnitude of an omission or misstatement of accounting

information that makes it probable that the judgment of a
reasonable person would have been changed.

c 9. A measure of the auditor’s assessment of the likelihood that

there are material misstatements before considering the
effectiveness of internal control.

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70. In practice, auditors rarely assign numerical probabilities to inherent risk,
medium control risk, or acceptable audit risk. It is more common to assess these
risks as high, medium, or low. For each of the four situations below, fill in
the blanks for planned detection risk and the amount of evidence you would
plan to gather (“planned evidence”) using the terms high, medium, or low.

SITUATION

1 2 3 4

Acceptable audit risk Low Low High High

Inherent risk High Low Low Low

Control risk High Low Medium Low

Planned detection risk ______ ______

______ ______

Planned evidence ______ ______

______ ______

Answer: 1. low, high

2. medium, medium
3. medium, medium
4. high, low

71. The auditor’s preliminary judgment about materiality is the maximum

easy amount by which the auditor believes the financial statements could be
a misstated and still not affect the decisions of reasonable users.
a. True
b. False

72. There is no precise definition of materiality in the professional literature.

easy a. True
a b. False

73. The FASB definition of materiality focuses on potential users of financial

easy statements.
b a. True
b. False

74. Net income before taxes is normally the most important base for deciding
easy materiality.
a a. True
b. False

75. Most practitioners allocate the preliminary judgment about materiality to

easy income statement accounts.
b a. True
b. False

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76. The primary purpose of allocating the preliminary judgment about
easy materiality to financial statement accounts is to help the auditor decide the
a appropriate evidence to accumulate.
a. True
b. False

77. Auditors cannot use prior year financial statement balances to establish
easy their preliminary judgment about materiality in planning the current year’s
b audit.
a. True
b. False

78. If acceptable audit risk is low, and inherent risk and control risk are both
easy high, then planned detection risk should be high.
b a. True
b. False

79. Inherent risk and planned detection risk are inversely related; i.e., as
easy inherent risk increases, planned detection risk should decrease, ceteris
a paribus.
a. True
b. False

80. Acceptable audit risk and planned detection risk are inversely related; i.e.,
easy as acceptable audit risk increases, planned detection risk should decrease,
b ceteris paribus.
a. True
b. False

81. The most important element of the audit risk model is control risk.
easy a. True
b b. False

82. For a private company client, auditors are required to test any internal
easy controls they believe have not been operating effectively during the period
b under audit.
a. True
b. False

83. If an auditor believes the client will have financial difficulties after the audit
easy report is issued, and external users will be relying heavily on the financial
a statements, the auditor will probably set acceptable audit risk as low.
a. True
b. False

84. Achieved detection risk can be reduced only by accumulating more audit
medium evidence.
b a. True
b. False

85. Auditors have difficulty applying the concept of materiality in practice

medium because they often do not know who the users of the financial statements
a are or what decisions will be made.
a. True
b. False
Arens/Elder/Beasley
86. The audit risk model that must be used for planning audit procedures and
medium evaluating audit results is: AcAR = IR x CR x AcDR.
b a. True
b. False

87. Statements on Auditing Standards provide detailed, objective guidance on

medium how auditors are to establish a preliminary materiality level, thus eliminating
b the need for subjective auditor judgment in this task.
a. True
b. False

88. If the preliminary judgment of materiality increases, the amount of audit

medium evidence required will also increase.
b a. True
b. False

89. Insert risk and control risk are normally assessed for the overall audit.
medium a. True
b b. False

90. Tolerable misstatement is the maximum combined total of all misstatements

medium in the financial statements that the auditor is willing to allow, or tolerate,
b when issuing a standard unqualified opinion.
a. True
b. False

91. If an auditor assigns a tolerable misstatement of $1,000 to accounts

medium payable, he or she would need to obtain more audit evidence for that
a account than if $100,000 had been assigned.
a. True
b. False

92. To maximize audit efficiency, the auditor should allocate less tolerable
medium misstatement to accounts that can be verified by using low-cost audit
a procedures, such as analytical procedures, than to accounts that are more
costly to audit.
a. True
b. False

93. To maximize audit effectiveness, the auditor should establish a high

medium preliminary judgment about materiality and allocate most of the amount to
b balance sheet accounts.
a. True
b. False

94. Acceptable audit risk and the amount of substantive evidence required are
medium inversely related.
a a. True
b. False

95. As control risk increases, the amount of substantive evidence the auditor
medium plans to accumulate should increase.
a a. True
b. False

Arens/Elder/Beasley
96. Inherent risk and control risk are directly related.
medium a. True
b b. False

97. An acceptable audit risk assessment of low indicates a risky client requiring
medium more extensive evidence, assignment of more experienced personnel,
a and/or a more extensive review of audit files.
a. True
b. False

98. Engagement risk is effectively the audit firm’s business risk.

medium a. True
a b. False

99. Audit assurance is the complement of planned detection risk, that is, one
medium minus planned detection risk.
b a. True
b. False

Arens/Elder/Beasley