Questions and Answers ACCT 431: Auditing and Assurance Services, 15e (Arens) Chapter 9 Materiality and Risk

2: A) material. B) insignificant. C) significant. D) relevant. Terms: FASB Statement No. 2; Probable judgment of a reasonable person Objective: LO 9-1 2) The scope paragraph of the standard unqualified auditor’s report states that ” the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement.” What type of assurance is given? A) Immediate B) Limited C) Reasonable D) Absolute Terms: Type of assurance provided Objective: LO 9-1 3) Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of: A) regulators. B) the audit firm’s managing partner. C) the client shareholders. D) the client. Terms: Discovery of a material misstatement must bring it to the attention Objective: LO 9-1 4) Determining materiality requires professional judgment. A) True B) False Terms: Materiality Objective: LO 9-1 Learning Objective 9-2 1) Audit standards require the auditor to consider materiality early in the audit. Which statement(s) regarding preliminary materiality are true? I. Preliminary materiality may change during the engagement. II. Preliminary materiality is the maximum amount by which the auditor believes the financials could be misstated and still not affect the decisions of reasonable users. A) I only B) II only C) both I and II D) neither are true Terms: Preliminary materiality assessment Objective: LO 9-2 2) Why do auditors establish a preliminary judgment about materiality? A) To determine the appropriate level of staff to assign to the audit B) So that the client can know what records to make available to the auditor C) To help plan the appropriate evidence to accumulate D) To finalize the control risk assessment Terms: Purpose to establish preliminary judgment about materiality Objective: LO 9-2 3) If an auditor establishes a relatively high level for materiality, then the auditor will: A) accumulate more evidence than if a lower level had been set. 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. Terms: High level for materiality Objective: LO 9-2 4) The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related. A) directly B) indirectly C) not D) inversely Terms: Preliminary judgment about materiality and amount of evidence accumulated Objective: LO 9-2 5) Which of the following is the primary basis used to decide materiality for a for-profit entity? A) Net sales B) Net assets C) Net income before tax D) All of the above Terms: Primary basis to decide materiality for a for-profit entity Objective: LO 9-2 6) Auditing standards ________ that the basis used to determine the preliminary judgment about materiality be documented in the audit files. A) permit B) do not allow C) require D) strongly encourage Terms: Auditing standards; Preliminary judgment about materiality documented Objective: LO 9-2 7) Amounts involving fraud are usually considered ________ important than unintentional errors of equal dollar amounts. A) less B) no less C) no more D) more Terms: Amounts involving fraud Objective: LO 9-2 8) Qualitative factors can affect an auditor’s assessment of materiality. Which of the following statements is true? I. Misstatements that are otherwise immaterial may be material if they affect earnings trends. II. Misstatements that are otherwise minor may be material if there are possible consequences arising from contractual obligations. A) I only B) II only C) I and II D) neither I nor II Terms: Qualitative factors can affect auditor’s assessment of materiality Objective: LO 9-2 9) The five steps in applying materiality are listed below in random order. 1. Estimate the combined misstatement. 2. Estimate the total misstatement in the segment. 3. Set materiality for the financial statements as a whole. 4. Determine performance materiality. 5. Compare combined estimate with preliminary judgment about materiality. The first three steps in correct sequence would be: A) 1, 2, 5 B) 3, 4, 2 C) 2, 1, 5 D) 3, 2, 4 Terms: Five steps in applying materiality Objective: LO 9-2 10) Which of the following statements is not correct? A) Materiality is a relative rather than an absolute concept. 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. Terms: Materiality Objective: LO 9-2 11) 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 demonstrates this? A) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings Yes Yes B) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings No No C) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings Yes No D) Amounts involving frauds are considered more important than errors of equal amount Misstatements that are otherwise immaterial may be material if they affect a trend in earnings No Yes Terms: Certain types of misstatements are likely more important than other types Objective: LO 9-2 12) When setting a preliminary judgment about materiality: A) more evidence is required for a low dollar amount than for a high dollar amount. 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. Terms: Setting preliminary judgment about materiality Diff: Challenging Objective: LO 9-2 13) Lewis Corporation has a few large accounts receivable that total one million dollars whereas Clark Corporation has many small accounts receivable that total one million dollars. Misstatement in any one account is more significant for Lewis corporation because of the concept of: A) materiality. B) audit risk. C) reasonable assurance. D) comparative analysis. Terms: Misstatements Diff: Challenging Objective: LO 9-2 14) Audit standards require the auditor to consider the combined amount of misstatement early in the audit. This is known as preliminary materiality judgment. List and discuss the three main factors that affect an auditor’s preliminary judgment about materiality. 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. Benchmarks are needed for evaluating materiality. Because materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Net income before taxes is normally the most commonly used benchmark, but other possible benchmarks 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. Terms: Factors that affect auditor’s preliminary judgment Objective: LO 9-2 15) Due to qualitative factors, certain types of misstatements are likely to be 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. 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. Amounts affecting a trend in earnings. Amounts that are otherwise immaterial may be material if they affect a trend in earnings. An example is if reported income has increased 3 percent annually for the past five years but income for the current year has declined 1 percent, that change may be material. Similarly, a misstatement that would cause a loss to be reported as a profit may be of concern. Terms: Qualitative factors that affect auditor’s materiality judgment Objective: LO 9-2 16) The auditor’s preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users. A) True B) False Terms: Preliminary judgments about materiality Objective: LO 9-2 17) Preliminary judgments about materiality are often changed during the course of the engagement. A) True B) False Terms: Preliminary judgments about materiality Objective: LO 9-2 18) Net assets are the most often used base for deciding materiality. A) True B) False Terms: Base for deciding materiality Objective: LO 9-2 19) The lower the dollar amount of the preliminary judgment the more audit evidence is required. A) True B) False Terms: Amount of preliminary judgment and audit evidence required Objective: LO 9-2 20) Amounts involving fraud are not usually considered qualitative factors affecting the preliminary materiality judgment. A) True B) False Terms: Qualitative factors affecting preliminary materiality judgment; Fraud Objective: LO 9-2 21) CPA firms can establish policy guidelines to help their auditors determine materiality. A) True B) False Terms: Difficulty in applying concept of materiality Objective: LO 9-2 22) Statements on Auditing Standards provide detailed, objective guidance on how auditors are to establish a preliminary materiality level, thus eliminating the need for subjective auditor judgment in this task. A) True B) False Terms: Statements on Auditing Standards; Objective guidance on establishing preliminary materiality level Objective: LO 9-2 23) If the preliminary judgment of materiality increases, the amount of audit evidence required will decrease. A) True B) False Terms: Preliminary judgment of materiality and audit evidence Objective: LO 9-2 24) Net income before tax is the normal base used to determine materiality in a not-for-profit company. A) True B) False Terms: Base used to determine materiality Objective: LO 9-2 Learning Objective 9-3 1) When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocated to any given account balance is referred to as: A) the materiality range. B) the error range. C) tolerable materiality. D) performance materiality. Terms: Allocate preliminary judgment about materiality to account balances Objective: LO 9-3 2) Auditors generally allocate the preliminary judgment about materiality to the: A) balance sheet only. B) income statement only. C) income statement and balance sheet. D) statement of cash flows. Terms: Preliminary materiality allocation Objective: LO 9-3 3) Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts? 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. Terms: Allocation of preliminary judgment about materiality Objective: LO 9-3 4) Which of the following statements is true concerning the allocation of preliminary materiality? A) It is necessary to allocate preliminary materiality to financial statements as a whole rather than by segments. B) Preliminary materiality should be allocated to income statement accounts only. C) Preliminary materiality is required by the SEC. D) The PCAOB term used when preliminary materiality is allocated to segments is tolerable misstatement. Terms: Allocation of preliminary materiality Objective: LO 9-3 5) Which of the following statements is false? 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. Terms: Effects of misstatements Objective: LO 9-3 6) Which of the following are major difficulties auditors face when allocating materiality to balance sheet accounts? A) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes No Yes B) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes Yes No C) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation Yes Yes Yes D) Certain accounts contain more misstatements than others Only overstatements need be considered Audit costs can affect allocation No Yes No Terms: Major difficulties auditors face when allocating materiality to balance sheet accounts Objective: LO 9-3 7) When allocating performance materiality: A) it is easy to predict in advance which accounts are mot likely to be misstated. B) only overstatements need to be considered. C) professional judgment is critical. D) the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality. Terms: Major difficulties auditors face when allocating materiality to balance sheet accounts Objective: LO 9-3 8) When allocating materiality, most practitioners choose to allocate to: A) the income statement accounts because they are more important. B) the balance sheet accounts because most audits focus on the balance sheet. C) both balance sheet and income statement accounts because there could be errors on either. D) all of the financial statements because it is required by GAAS. Terms: Allocating materiality Diff: Challenging Objective: LO 9-3 9) Which of the following is a correct statement regarding performance materiality? A) Determining performance materiality is necessary because auditors accumulate evidence by segments. B) The level of performance materiality does not affect the amount of evidence needed. C) Performance materiality cannot vary for different classes of transactions. D) Performance materiality is required for public companies, but not for private companies. Terms: Tolerable misstatements Diff: Challenging Objective: LO 9-3 10) Explain why it is necessary to allocate the preliminary judgment about 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. llocating the preliminary judgment about materiality to individual accounts (segments) is necessary because evidence is accumulated for accounts (segments) rather than for the financial statements as a whole. Allocating to accounts (segments) 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 most income statement misstatements have an equal effect on the balance sheet due to the nature of double-entry accounting. Because there are fewer balance sheet accounts than income statement accounts in most audits, and because most audit procedures focus on balance sheet accounts, materiality should be allocated only to balance sheet accounts. Terms: Allocation of the preliminary judgment about materiality Objective: LO 9-3 11) Auditor’s allocate the preliminary judgment about materiality to financial statement segments rather than by financial statements as a whole. What is the term for the auditor’s allocation of preliminary misstatement to account balances? What are three difficulties auditor’s face when allocating materiality to balance sheet accounts? Performance materiality is the term for the auditor’s allocation of the preliminary judgment of materiality to any given account balance. The three difficulties auditors face when allocating the preliminary materiality to account balances are: 1. Auditors expect certain accounts to have more misstatement than others. 2. Both overstatements and understatements must be considered. 3. Audit costs can affect the allocation. Terms: Allocation of preliminary misstatement to account balances and difficulties that auditors face allocating preliminary materiality judgment to account balances Objective: LO 9-3 12) Most practitioners allocate the preliminary judgment about materiality to both the balance sheet and income statement accounts. A) True B) False Terms: Allocate preliminary judgment about materiality to balance sheet accounts Objective: LO 9-3 13) The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate. A) True B) False Terms: Primary purpose of allocating the preliminary judgment about materiality Objective: LO 9-3 14) Both overstatements and understatements must be considered when allocating materiality to balance sheet accounts. A) True B) False Terms: Allocating materiality; Consideration of overstatements and understatements Objective: LO 9-3 15) If an auditor assigns a tolerable misstatement of $1,000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100,000 had been assigned. A) True B) False Terms: Tolerable misstatements and audit evidence Objective: LO 9-3 16) To maximize audit efficiency, the auditor should allocate less tolerable misstatement to accounts that can be verified by using low-cost audit procedures, such as analytical procedures, than to accounts that are more costly to audit. A) True B) False Terms: Maximize audit efficiency, allocate less tolerable misstatements Objective: LO 9-3 Learning Objective 9-4 1) Auditors are ________ to document the known and likely misstatements in the financial statements under audit. A) permitted B) required C) not allowed D) strongly encouraged Terms: Known and likely misstatements in the financial statements Objective: LO 9-4 2) ________ misstatements are those where the auditor can determine the amount of the misstatement in the account. A) Potential B) Likely C) Known D) Projected Terms: Misstatements where auditor can determine the amount Objective: LO 9-4 3) Likely misstatements can result from: A) Computation of the sampling error for the cash account Differences between management’s and an auditor’s judgment about account balances Projections of misstatements based on an auditor’s tests of a sample from a population No Yes Yes B) Computation of the sampling error for the cash account Differences between management’s and an auditor’s judgment about account balances Projections of misstatements based on an auditor’s tests of a sample from a population Yes Yes No C) Computation of the sampling error for the cash account Differences between management’s and an auditor’s judgment about account balances Projections of misstatements based on an auditor’s tests of a sample from a population No No Yes D) Computation of the sampling error for the cash account Differences between management’s and an auditor’s judgment about account balances Projections of misstatements based on an auditor’s tests of a sample from a population Yes No No Terms: Likely misstatements result from Objective: LO 9-4 4) When evaluating the audit findings, the auditor should be satisfied that the: A) amount of known misstatement is documented in the management representation letter. B) estimate of the total known and likely misstatements is less than a material amount. C) estimate of the total likely misstatement includes sample error. D) amount of known misstatement is acknowledged and recorded by the client. Terms: Evaluating audit findings and materiality Diff: Challenging Objective: LO 9-4 5) Discuss each of the five steps in applying materiality in an audit, and identify the audit phase(s) in which each step is performed. List these steps in the order in which they occur. 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 performance materiality. 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. Terms: Five steps in applying materiality in audit Diff: Challenging Objective: LO 9-2, LO 9-3, and LO 9-4 6) The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated. A) True B) False Terms: Preliminary judgment on materiality; Estimated total misstatements Objective: LO 9-4 7) Total estimated misstatements include known misstatements and projected misstatements plus a sampling error. A) True B) False Terms: Total estimated misstatements and sampling error Objective: LO 9-4 8) If the total misstatement of an account is known, a sampling error still needs to be determined. A) True B) False Terms: Total estimated misstatements and sampling error Objective: LO 9-4 9) Sampling error represents the minimum misstatement amount that exists in all accounts subjected to sampling. A) True B) False Terms: Total estimated misstatements and sampling error Objective: LO 9-4 10) If the auditor approaches the audit of the accounts in s sequential manner, the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later. A) True B) False Terms: Total estimated misstatements and sampling error Objective: LO 9-4 Learning Objective 9-5 1) Which of the following audit risk components may be assessed in non-quantitative terms? A) Control Risk Inherent Risk Detection Risk Yes Yes Yes B) Control Risk Inherent Risk Detection Risk Yes Yes No C) Control Risk Inherent Risk Detection Risk No No Yes D) Control Risk Inherent Risk Detection Risk No No No Terms: Audit risk components assessed in non-quantitative terms Objective: LO 9-5 2) Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) increase materiality levels. B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk. Terms: Control risk and planned audit risk model Diff: Challenging Objective: LO 9-5 3) When dealing with audit risk: A) auditors accept some level of risk in performing the audit function. B) most risks that auditors encounter are relatively easy to measure. C) the audit risk model is only used for classes of transactions. D) most audit firms prefer to use a quantitative assessment for risk. Terms: Audit risk Objective: LO 9-2 and LO 9-5 4) Why do auditors use the audit risk model when planning an audit? The audit risk model is used primarily for planning purposes in deciding how much evidence to accumulate in each cycle. The auditor sets an acceptable level of audit risk, (AAR) assesses inherent risk (IR) and control risk (CR), and then uses the following audit risk model to determine an appropriate level of planned detection risk (PDR): PDR = Terms: Audit risk model Objective: LO 9-5 5) The most important element of the audit risk model is control risk. A) True B) False Terms: Audit risk model and control risk Objective: LO 9-5 6) The audit risk model that must be used for planning audit procedures and evaluating audit results is: = AAR. A) True B) False Terms: Audit risk model Objective: LO 9-5 Learning Objective 9-6 1) The measurement of the auditor’s assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as: A) audit risk. B) inherent risk. C) sampling risk. D) detection risk. Terms: Assessment of likelihood of material misstatements due to error or fraud Objective: LO 9-6 2) The risk that audit evidence for a segment will fail to detect misstatements exceeding performance materiality levels is: A) audit risk. B) control risk. C) inherent risk. D) planned detection risk. Terms: Risk audit evidence will fail to detect misstatements Objective: LO 9-6 3) As the risk of material misstatement increases, detection risk should: A) medium increase. B) decrease. C) stay the same. D) Is indeterminate. Terms: Risk of material misstatement increases, detection risk Objective: LO 9-6 4) Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence. A) directly, inversely B) directly, directly C) inversely, inversely D) inversely, directly Terms: Relationship of inherent risk, detection risk, and amount of audit evidence Objective: LO 9-6 5) 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) inherent risk Terms: Audit assurance, overall assurance and level of assurance Objective: LO 9-6 6) If planned detection risk is reduced, the amount of evidence the auditor accumulates will: A) increase. B) decrease. C) remain unchanged. D) be indeterminate. Terms: Assess control risk Objective: LO 9-6 7) Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate. II. is dependent on inherent risk and business risk. A) I only B) II only C) I and II D) None of the above Terms: Planned detection risk Objective: LO 9-6 8) Inherent risk is often high for an account such as: A) inventory. B) land. C) capital stock. D) notes payable. Terms: Inherent risk Objective: LO 9-6 9) Inherent risk and control risk: A) are inversely related to each other. B) are inversely related to detection risk. C) are directly related to detection risk. D) are directly related to audit risk. Terms: Inherent risk and control risk Objective: LO 9-6 10) To what extent do auditors typically rely on internal controls of their public company clients? A) Extensively B) Only very little C) Infrequently D) Never Terms: Extent auditor rely on internal controls of public company client Objective: LO 9-6 Topic: Public 11) Auditors typically rely on internal controls of their private company clients: A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. 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. Terms: Extent auditor rely on internal controls of private company client Objective: LO 9-6 12) Which is a true statement about audit risk? A) Audit risk measures the risk that a material misstatement could occur and not be detected by internal control. B) When auditors decide on a higher acceptable audit risk, they want to be more certain that the financial statements are not materially misstated. C) Audit assurance is the complement of acceptable audit risk. D) There is an inverse relationship between acceptable audit risk and planned detection risk. Terms: Acceptable audit risk Diff: Challenging Objective: LO 9-6 13) The risk of material misstatement refers to: A) control risk and acceptable audit risk. B) inherent risk. C) the combination of inherent risk and control risk. D) inherent risk and audit risk. Terms: Risk of material misstatements Diff: Challenging Objective: LO 9-6 14) When assessing risk, it is important to remember that: A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients. B) inherent risk can be changed by the auditor. C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined. D) control risk is determined by company management since they are responsible for internal control. Terms: Difference between material misstatement and detection risk Diff: Challenging Objective: LO 9-6 15) Auditors may assess inherent risk and control risk: A) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model Yes Yes B) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model No No C) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model Yes No D) Jointly to determine the risk of material misstatement Separately and combine their effects in the audit risk model No Yes Terms: Auditor may assess inherent risk and control risk Diff: Challenging Objective: LO 9-6 16) In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following? A) The internal audit department’s objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee B) The risk the internal control system will not detect a material misstatement of a financial statement assertion C) The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion D) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls Terms: Inherent risk assessment Diff: Challenging Objective: LO 9-6 17) Which of the following statements is not true? A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required. B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required. C) Inherent risk is the susceptibility of the financial statements to material error, ass

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