University of Mindanao - Main Campus (Matina, Davao City)

ACCOUNTING

Lets Analyze

1)Which of the following is incorrect about materiality?

1. 1. Materiality is an absolute concept.
   2. It is necessary to have bases for establishing whether misstatements are material.
   3. Certain types of misstatements are likely to be more important to users than others, even if the peso amounts are the same.
   4. Materiality is a matter of professional judgment.

2. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and materiality?
   1. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
   2. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce reliance on internal evidence.
   3. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
   4. Aggregate materiality thresholds should not change under conditions of changing risk levels.

3. Which of the following statements concerning materiality thresholds is incorrect?
   1. Aggregate materiality thresholds are a function of the auditor's preliminary judgments concerning audit risk.
   2. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold.
   3. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements is referred to as a "materiality threshold."
   4. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors.

4. An audit should consider material when

1. Determining the nature, timing, and extent of audit procedures.
2. Evaluation the effect of misstatements.

2. I only
3. II only
4. Both I and II
5. Neither I nor II

5. Which of the following is not a way in which auditors use the concept of overall

As a guide to the evaluation of evidence.

1. 1. As a guide for making decisions about the audit report.
   2. As a guide for assessing control risk.

6. Which of the following level of materiality will require more evidence to be gathered by the auditor?

1. 5% of profit before tax
2. 8% of profit before tax

1. 1. I
   2. II
   3. Either I or II
   4. Neither I nor II

7. Which of the following pertains to the risk that the financial information may be materially misleading and/or false?
   1. Assurance Engagement Risk
   2. Audit Risk
   3. Information Risk
   4. Significant Risk

8. The following are the benefits claimed for the practice of determining materiality in the initial planning stage of starting an audit, except
   1. Avoiding the problems of doing too little work (under auditing).
   2. Avoiding the problem of doing more work than necessary (over auditing).
   3. Being able to decide early what kind of audit opinion to express.
   4. Being able to fine tune the audit work for effectiveness and efficiency.

9. Which of the following statements best describes the concept of materiality?
   1. It is determined using the guidelines established by the PICPA.
   2. It depends only on the amount of an item.
   3. It depends on the nature of an item but not on the amount.
   4. It is largely a matter of professional judgment.

10. The concept of materiality is applied in which of the following areas of financial statements:

1. Planning
2. Execution
3. Evaluation iv.

1. 1. i and ii only
   2. i and iii only
   3. ii and iii only
   4. i, ii, and iii

11. The preliminary judgment about materiality and the amount of audit evidence accumulated are                                                           related.

1. 1. Directly
   2. Not
   3. Indirectly
   4. Inversely

12. As it relates to an audit, materiality is
    1. Not taken into consideration.
    2. Related only to the sufficiency of procedures performed.
    3. Based upon audit fees.
    4. Determined based upon the importance to a user of the financial statements.

13. Which of the following is not true about materiality judgment?
    1. The auditor’s consideration of materiality is influenced by the auditor’s perception of the needs (importance) of users of financial statements.
    2. The auditor considers materiality only in relation to classes of transactions, account balances, and disclosures.
    3. Materiality judgment makes sure that the auditor gathers sufficient evidential matter to obtain reasonable assurance about whether the financial statements are free of material misstatement.
    4. Materiality decision differs from one audit client to another.

14. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
    1. The results of the initial assessment of control risk.
    2. The anticipated sample size for planned substantive tests.
    3. The entity’s financial statements of the prior years.
    4. The assertions that are embodied in the financial statements.

15. Which of the following would be an appropriate basis for materiality?
    1. 5-10% of the unadjusted errors from the previous audited financial statements.
    2. 5-10% of normalized income + 100% of extraordinary items (after- tax).
    3. 0.5%-5% of equity.
    4. 10% of recorded expenses.

16. Which of the following is a qualitative factor that could affect the level of planning materiality for a financial statement audit?
    1. The entity’s net income before income taxes.
    2. The entity’s total assets.
    3. The entity’s net income after income taxes.
    4. A misstatement that changes a loss into income.