Professional Documents
Culture Documents
The following questions deal with materiality. Choose the best response.
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.
Answer: (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 auditors consideration of materiality is influenced by the auditors
perception of the needs of a reasonable person who will rely on the financial
statements.
Answer: (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.
c. In considering materiality for planning purposes, an auditor believes that
misstatements aggregating $10,000 will have a material effect on an entitys 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
Answer: (1) $10,000
9-23
The following questions concern audit risk. Choose the best response.
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.
8. The company has an organizational chart that establishes the formal lines of
reporting and authorization protocols.
Answer: Control Environment.
9. The compensation committee reviews compensation plans for senior executives to
determine if those plans create unintended pressures that might lead to distorted
financial statements.
Answer: Risk Assessment.
10. On a monthly basis, department heads review a budget to actual performance report
and investigate unusual differences.
Answer: Control Activities.