In considering materiality for planning purposes, an auditor believes that misstatements aggregating 1% of the total assets, where total assets is P1,000,000 would have a material effect on an entity’s balance sheet, but that misstatements would have to aggregate 5% of gross margin, where gross margin is P4,000,000 to materially affect the income statement. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate

In considering materiality for planning purposes, an auditor believes that misstatements aggregating 1% of the total assets, where total assets is P1,000,000 would have a material effect on an entity’s balance sheet, but that misstatements would have to aggregate 5% of gross margin, where gross margin is P4,000,000 to materially affect the income statement. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter14: Completing A Quality Audit

Section: Chapter Questions

Problem 3CYBK

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In considering materiality for planning purposes, an auditor belives that misstatements aggregate P100,000 would have a metrial effect on an entity's income statement, but that miststatement would have to aggregate P200,000 to materially effect the balance sheer. Ordinarilu, it would be appropriate to design procedures that would be expected to detect misstatements that aggregate. A. P100,000 B. P200,000 C. 150,000 D. P300,000
You are reviewing the results of the Firestone audit. These are the details of the summay of identified misstatements: • Allowance for Doubtful Accounts: $60,000 misstatement (over) • Sales Revenue: $10,000 misstatement (under) • Total identified misstatements: $50,000 (impact on Assets, pre-tax income, and equity) • Performance materiality was set at $60,000 REQUIRED: a) If overall materaility for the audit was set at $30,000, what type of audit report would be issued? Why? b) If overall materiality for the audit was set at $75,000, what type of audit report would be issued? Why?
Auditors make materiality judgments during the planning/risk assessment phase of the audit to be sure they ultimatelygather sufficient evidence during the audit to provide reasonableassurance that the financial statements are free of material misstatements.The lower the materiality threshold that an auditorhas for an account balance, the more the evidence that the auditormust collect. Auditors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whethermisstatements materially affect the financial statements, but ultimatelyit is an auditor’s individual professional judgment as towhether a given misstatement is or is not considered material.a. What is the relationship between the level of riskiness of theclient and the level of misstatement in an account balancethat an auditor would consider material? For example,assume that Client A has weaker controls over accountsreceivable compared to Client B (therefore, Client A is riskierthan Client B).…
Auditors make materiality judgments during the planning phase of the audit in order to be sure they ultimately gather sufficient evidence during the audit to provide reasonable assurance that the financial statements are free of material misstatements. The lower the materiality threshold that an auditor has for an account balance, the more the evidence that the auditor must collect. Auditors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whether misstatements materially affect the financial statements, but ultimately it is an auditor’s individual professional judgment as to whether a given misstatement is or is not considered material. What is the relationship between the level of riskiness of the client and the level of misstatement in an account balance that an auditor would consider material? For example, assume that Client A has weaker controls over accounts receivable compared to Client B (therefore, Client A is riskier than Client…
Which of the following statements is incorrect? A. As the risk of material misstatement in the financial statements increases, the auditor relies more on substantive analytical procedures rather than tests of details of transactions and balances B. It is common, but not required, to use analytical procedures as substantive tests; C. Tests of transactions are often performed during the interim audit work D.Tests of details of balances are normally done during the year-end audit work
In an audit sampling application, an auditora. Performs procedures on all items in a balance and makes a conclusion about the entirebalance.b. Performs procedures on less than 100 percent of the items in a balance and formulates aconclusion about the entire balance.c. Performs procedures on less than 100 percent of the items in a class of transactions tobecome familiar with the client’s accounting system.d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit.
During the risk assessment procedures, while understanding the client's financial position, the auditor observed that the receivable turnover of the client which was 10 times is significantly lower than that of the industry which was 15 times. This information is significant in designing audit procedures in validating which financial statement assertion for accounts receivable? a. Existenceb. Completenessc. Valuationd. Rights and Obligatione. None of the above
Auditors use different types of audit procedures to gather the evidencenecessary to conclude that the risk of material misstatement for each relevant assertion has been reduced to an acceptably low level. List eight different types of procedures auditors can use during an audit of financial statements, and give an example of each.
Your view of what the companies’ auditors would need to consider in the effective audit of its primary revenues. For example, what would you do to audit the revenue streams? How would you verify that they are correctly stated in the financial statements without material error? Identify no more than three audit procedures around revenue recognition for the company you selected.
Assume that you are using attributes sampling to test the controlsover revenue recognition of the Packet Corporation, a public company.You will use the results as part of the evidence on which to baseyour opinion on internal controls and to determine what substantiveauditing procedures you should performed on revenue and accountsreceivable. You have decided to test the following controls and have setthe risk of overreliance at 5%, the tolerable deviation rate at 5%, and the expected deviation rate at 1%. A sample size of 100 is used. (Notethat this sample size is just rounded up from the sample size of 93 thatwould have been obtained from the appropriate table.) The results ofyour testing are as indicated here. a. Determine the upper limit of deviation for each of the controls.b. What impact do these results have on the type of opinion to begiven on the client’s internal controls?c. Indicate the potential misstatements that could result from thecontrol deviations.d. Determine what…
_____ means the application of audit procedures to less than 100% of the items within an account balance or class of transactions to enable the auditor to obtain and evaluate audit evidence. a. Inspection b. Observation c. Audit sampling d. Analytical Procedure
The auditors of Landi Corporation wish to use a structured approach to nonstatistical sampling to evaluate the reasonableness of the accounts receivable. Landi has 15,000 receivable accounts with a total book value of $2,500,000. The auditors have assessed the combined level of inherent and control risk at a moderate level and believe that their other substantive procedures are so limited as to require a “maximum” risk assessment. After considering the overall audit plan, the auditors believe that the test’s tolerable misstatement is $57,500. Use figure below to determine the reliability factor. Please calculate the sample size. Risk That Other Substantive Procedures Will Fail to Detect a Material Misstatement Combined Assessment of Inherent and Control Risk Maximum Moderate Low Maximum 3.0 2.3 1.9 Slightly below Maximum 2.7 2.0 1.6 Moderate 2.3 1.6 1.2 Low 1.9 1.2 1.0