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21.     Which of the following statements is not correct?
medium     a.     Materiality is a relative rather than an absolute concept.
     b.     Normally, 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.

medium     Since materiality is relative, it is necessary to have bases for establishing whether misstatements are material. Normally, the most common base for deciding what is material is
     a.     net income before taxes.
     b.     net working capital.
     c.     net income after taxes.
     d.     total assets.
medium     Certain types of misstatements are likely to be more important than other types to users, even if the dollar amounts are the same. Which of the following does not demonstrate this?
     a.     Amounts involving frauds are considered more important than errors of equal amount.
     b.     Misstatements that are otherwise minor may be considered material if there are possible consequences arising from contractual obligations.
     c.     Misstatements that are otherwise immaterial may be material if they affect a trend in earnings.
     d.     Each of the above demonstrates this concept.
medium     The more effective the internal controls, the lower the risk factor that

     a.     should be.
     b.     could be.
     c.     is.
     d.     must be.
medium     Allocating the preliminary judgment about materiality to segments of the financial statements is necessary because
     a.     evidence is accumulated for the financial statements as a whole so the materiality doesn’t 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.
26.     Which of the following statements is not correct?
     a.     Either an overstatement of an asset account or an understatement of a 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.
medium     Regardless of how the allocation of the preliminary judgment about materiality was done, when the audit is complete the auditor must be confident that the combined errors in all accounts are
     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.
medium     Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to

     a.     detection risk.
     b.     audit report risk.
     c.     acceptable audit risk.
     d.     none of the above.
29.     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.
     b.     client’s need to achieve an unqualified opinion.
     c.     the auditor’s need to follow GAAS.
     d.     the auditor’s expectations of errors and assessment of the control structure.
30.     If planned detection risk is reduced, the amount of substantive evidence the auditor accumulates will
medium     a.     increase.
     b.     decrease.
     c.     remain unchanged.
     d.     be indeterminate.
medium     When discussing control risk (CR) and the audit risk model, which of the following statements is not true?
     a.     CR is a measure of the auditor’s assessment of the likelihood that misstatements exceeding a tolerable amount will not be prevented or detected by the client’s internal controls.
     b.     If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he/she would assign a 0% to CR.
     c.     The relationship between control risk and detection risk is inverse.
     d.     The relationship between control risk and evidence is direct.
medium     Which of the following is not a good indicator of the degree to which statements are relied on by external users?
     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.
medium     In situations in which the auditor believes the chance of financial failure or loss is high, and there is a corresponding increase in client business risk for the auditor, acceptable audit risk should
     a.     be reduced.
     b.     be increased.
     c.     remain the same.
     d.     be calculated using a computerized statistical package.
medium     When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally
     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.
medium     Many account balances require estimates and/or a great deal of management judgment. One area that does not require such judgment would be
     a.     allowance for uncollectible accounts.
     b.     useful life of equipment for tax purposes.
     c.     obsolete inventory.
     d.     liability for warranty payments.
medium     Inherent risk is reduced where the likelihood of defalcations is low. This would be true for an account such as
     a.     inventory.
     b.     marketable securities.
     c.     cash.
     d.     accounts receivable.
medium     The auditor assesses control risk and inherent risk. On a typical engagement, the auditor would be least likely to assess these for
     a.     each audit objective.
     b.     each cycle.
     c.     each account.
     d.     the overall audit.
38.     Acceptable audit risk is ordinarily set by the auditor during planning and
medium     a.     held constant for each major cycle and account.
     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.
medium     When the auditor is attempting to determine the extent to which external users rely on a client’s financial statements, they may consider several factors including
     a.     client size.
     b.     concentration of ownership.
     c.     types and amounts of liabilities.
     d.     all of the above.
40.     A major limitation in the application of the audit risk model is
medium     a.     the difficulty in defining the terms of the model.
     b.     the difficulty in measuring the components of the model.
     c.     the difficulty in understanding the effect on other factors in the model when one factor is changed.
     d.     the failure of the Audit Standards Board (ASB) of the AICPA to accept it and incorporate it into the SASs.

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