June 2009 - F8 Bit Session 3

[siddharth]

Hi,

Answers are expected within wednesday

1. Which of the following can be controlled by the auditor?

a. Inherent risk
b. Detection risk
c. Control risk
d. Both detection and control risk

2. If the auditor assesses control and inherent risks as low, what would you expect the auditor to do?

a. Perform no substantive procedures
b. Perform no tests of control because of the low level of control risk
c. Perform a relatively small number of substantive procedures.
d. Re-evaluate his or her acceptable level of audit risk

3. Inherent risk would be considered to be high where

a. the company’s profit for the year is the same as last year.
b. The chief accountant has been with the company for 15 years.
c. The newly appointed finance director was previously the marketing manager.
d. The company has decided to set up an internal audit department.

4. Which of the following statements best describes the audit approach to materiality?

a. Materiality is a matter for professional judgment.
b. Materiality is only relevant when planning the audit.
c. Materiality relates to the relative size of items within the financial statements.
d. Materiality is determined by reference to the professional standards

5. In determining the level of planning materiality for an audit, what should not be considered?

a. prior year’s error
b. Trends in the industry within which the company operates
c. The cost of the audit
d. The users of the financial statements

[Suze]

Answer
Question 1. Which of the following can be controlled by the auditor?
answer: b) Detection risk

Question 2. If the auditor assesses control and inherent risks as low, what would you expect the auditor to do?

answer: c) Perform a relatively small number of substantive procedures.

Question 3. Inherent Risk would be considered to be high whee

answer: c) the newly appointed finance director was previously the marketing manager.

Question 4. Which of the following statements best describes the audit approach to materiality?

answer: c) materiality relates to the relative size of items within the financial statements.

Question 5. In determining the level of planning materiality for an audit, what should not be considered?

answer: d) the users of the financial statements

I hope I have the correct answers.

[siddharth]

Hi Suze,

Its good to see your post.

Answers will be posted tomorrow

Keep watching other's answers too

Can you Justify your answer for question no. 5 more ellaborately ?

[Suze]

hi Sid

If we should prepare F/s based on its users then we will be preparing them the way they were being prepared back in the times and we will not be able to effectively compare them. Preparing f/s based on users would be bias.

hope you don't mind me shortening your name

Suze

[cmww]

My answers to questions:
1. Which of the following can be controlled by the auditor? - b. Detection risk

because inherent risks is the risk that comes with the business being the kind of business it is which cannot be controlled by the auditor and control risk- the risks that the business's internal control systems do not adequately protect it against all inherent risks is also not under the control of the auditor even though he can make recommendations to improve it, the final decision of implementation is under the control of the company's management.

2. If the auditor assesses control and inherent risks as low, what would you expect the auditor to do?
c. Perform a relatively small number of substantive procedures

because audit risk = detection risk x inherent risk x control risk - a small inherent and control risk factor makes for a low audit risk result. Therefore the auditor would not need to do as rigorous testing as in the case of high audit risk, since the controls in place would be likely to pick up errors,etc.


3. Inherent risk would be considered to be high where:-

a. the company’s profit for the year is the same as last year. I chose this answer because this is the only factor that seems to be determined by the industry being what it is and inherent risk is risk that results merely from being a particular type of business or being in the industry.


4. Which of the following statements best describes the audit approach to materiality?

c. Materiality relates to the relative size of items within the financial statements. because something is considered material if its omission or misstatement causes the users of the financial statements's decisions to be influenced by the its omission or misstatement. So its relative size in comparison to the total accounts is key.


Question 5. In determining the level of planning materiality for an audit, what should not be considered?


d) the users of the financial statements

[siddharth]

Answers

1. Which of the following can be controlled by the auditor?

b. Detection risk


2. If the auditor assesses control and inherent risks as low, what would you expect the auditor to do?

c. Perform a relatively small number of substantive procedures.


3. Inherent risk would be considered to be high where

c. The newly appointed finance director was previously the marketing manager.


4. Which of the following statements best describes the audit approach to materiality?

a. Materiality is a matter for professional judgment.


5. In determining the level of planning materiality for an audit, what should not be considered?

c. The cost of the audit

[siddharth]

Hi,

Suze and cmww or anyone who dont agree with the answers, let me know. we shall discuss further.

[Suze]

Hi

please explain why you choose 5 (c) the cost of the audit ?

[siddharth]

Hi Suze,

Good question

Definition of Materiality is "Information is material if its omission or misstatement could influence the economic decisions of USERS taken on the basis of the financial statements".In determining the level of planning materiality for an audit, what should not be considered

So Materiality pertains to the amount of misstatements that could affect the user's decisions which in turn means Users of the financial statements should be considered in planning the level of materiality for an audit. So it cannot be option D.

I choose option C because materiality should not be decided based on cost benefit analysis. It should be based on risk of material misstatement on financial statements.

Hope this helps, let me know if any more clarifications required.

[Suze]

Hi Sid

i thank you so much....i never thought of going back to the definition of materiality. Frankly that is a very good tip, for all of us students, of what we should think about when attempting to answer a question..........the definition.

suze

[siddharth]

Hey Suze,

See you in session 4, write your response within Sunday

[Asif]

i agree wid sidharth dat cost benefit analysis should not be considered when determining materialty..siddharth could you pls tell me from where r u getiing this question ?? coz the answer you wrote probably are the answer you found from the source...if the question and answer are from a reliable source then probably they maybe right and we wrong....

Could you pls explain me why transfer of manager from marketing to financial is inherent risk ? Coz i find 15 yrs of working experience of chief accountant is an inherent risk too ! bcoz of long working relation he is familiar with employee - bcoz of this familarity threat inherent risk increases...

[siddharth]

Hi,

Yes Asif, questions are taken from popular book, answers are also given in the same book. So sources and answers are reliable. no problem in it. i will give answer for your question shortly