CHAPTER 7

1. This involves developing an overall strategy for the expected 7. “Performance materiality” is the term used to indicate
conduct and scope of the examination; the nature, extent, and materiality at the:
timing of which vary with the size and complexity, and a. balance sheet level
experience with and knowledge of the entity. b. account balance level
a. Audit planning c. income statement level
b. Audit procedure d. company-wide level
c. Audit program
d. Audit working papers 8. When comparing level of materiality used for planning purposes
and the level of materiality used for evaluating evidence, one
2. Initial planning involves four matters. Which of the following is would most likely expect
not one of these? a. The level of materiality to be always similar.
a. Develop an overall audit strategy b. The level of materiality for planning purposes to
b. Request that bank balances be confirmed be similar.
c. Schedule engagement staff and audit specialists c. The level of materiality for planning purposes to
d. Identify the client’s reason for the audit be higher.
d. The level of materiality for planning purposes to
3. A CPA is conducting the first examination of a client’s financial be based on total assets while the level of
statements. The CPA hopes to reduce the audit work by materiality for evaluating purposes to be based on
consulting with the predecessor auditor and reviewing the net income.
predecessor’s working papers. This procedure is
a. Acceptable if the client and the predecessor 9. Qualitative factors can affect an auditor’s assessment of
auditor agree to it. materiality. Which of the following qualitative factors could
b. Acceptable if the CPA refers in the audit report to influence the assessment of materiality?
reliance upon the predecessor auditor’s work. I. Misstatements that are otherwise immaterial may
c. Required if the CPA is to render an unmodified be material if affect earnings trends.
opinion. II. Minor misstatements resulting from the
d. Unacceptable because the CPA should bring an consequences of contractual obligations.
independent viewpoint to a new engagement. a. I only
b. II only
4. The preliminary judgment about materiality and the amount of c. I and II
audit evidence accumulated are related. d. neither I or II
a. directly
b. indirectly 10. Auditors frequently refer to the terms audit assurance, overall
c. not assurance, ad level of assurance to refer to
d. inversely .
a. detection risk
5. According to PSA 320, materiality should be considered by the b. audit report risk
auditor when: c. acceptable audit risk
Determining the nature, timing d. inherent risk
Evaluating the effects
and extent of audit procedures. 11. The risk that financial statements are likely to be misstated
of misstatements materially without regard to the effectiveness of internal control
a. YES is the;
YES a. Inherent risk
b. YES b. Audit risk
NO c. Client risk
c. NO d. Control risk
NO
d. NO 12. When planning a financial statement audit, the auditor should
YES assess inherent risk at the
Financial statement level Account balance or
6. Which of the following statements is not correct about
transaction class level
materiality?
a. The concept of materiality recognizes that some a. YES
matters are important for fair presentation of YES
financial statements in conformity with the b. YES
applicable financial reporting framework, while NO
other matters are not important. c. NO
b. An auditor considers materiality for planning NO
purposes in terms of the largest aggregate level of d. NO
misstatements that could be material to any one YES
of the financial statements.
c. Materiality judgments are made in light of 13. Which of the following is an incorrect statement?
surrounding circumstances and necessarily a. Detection risk cannot be changed at the auditor’s
involve both quantitative and qualitative discretion.
judgments b. If individual audit risk remains the same,
d. An auditor’s consideration of materiality is detection risk bears an inverse relationship to
influenced by the auditor’s perception of the inherent and control risk.
needs of a reasonable person who will rely on the c. The greater the inherent and control risk the
financial statements. auditor believes exist, the less detection risk that
can be accepted.
 d. The auditor might make separate or combines
assessments of inherent risk and control risk.

14. Relationship between control risk and detection risk is ordinarily

a. Parallel
b. Direct
c. Inverse
d. Equal

15. Which of the following is not correct regarding an auditor’s

decision that a lower acceptable audit risk is appropriate?
a. More evidence is accumulated
b. Less evidence is accumulated
c. Special care is required in assigning experienced
staff
d. Review of audit documentation is performed by
personnel not assigned to the engagement

16. These consist of the analysis of significant ratios and trends

including the resulting investigation of fluctuations and
relationship that are inconsistent with other relevant information
or deviate from predictable amount.
a. Financial statement analysis
b. Variance analysis
c. Analytical procedures
d. Regression analysis

17. Which of the following statements about analytical procedures

is incorrect?
a. Analytical procedures are required to be
performed in the planning phase of the audit.
b. Analytical procedures are required to be done
during the testing phase of the audit.
c. Analytical procedures are required to be done
during the completion phase of the audit.
d. Analytical procedures may be performed in the
planning, testing and completion phases of the
audit.

18. In developing the overall audit plan and audit program, the
auditor should assess inherent risk at the:
Audit plan
Audit program
a. Financial statement level Accounting balance
level
b. Account balance level Financial
statement level
c. Account balance level Account
balance level
d. Financial statement level Financial statement
level

19. An auditor should design the written audit program so that

a. All material transactions will be selected for
substantive testing
b. Substantive tests prior to the balance sheet date
will be minimized.
c. The audit procedures selected will achieve
specific audit objectives.
d. Each account balance will be tested under either
tests of controls or tests of transactions.

20. Which of the following matters would least likely appear in the
audit program?
a. Specific procedures that will be performed.
b. Specific audit objectives.
c. Estimated time that will be spent in performing
certain procedures.
d. Documentation of the accounting and internal
control systems being reviewed.