MULTIPLE-CHOICE QUESTIONS
1. Which of the following statements is true regarding the concept of materiality?
a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
b. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it possible that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
c. A fact is material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.
d. Both (a) and (c) are correct.
e. Both (b) and (c) are correct.

2. Which of the following statements is true concerning the concept of performance materiality?
a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence.
b. If performance materiality is set too low, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements.
c. If performance materiality is set too high, the auditor might perform more substantive procedures than necessary.
d. Performance materiality is essentially the same posting materiality.
e. All of the above are true.

3. Which of the following statements represent the appropriate directional relationships between the concepts of inherent risk, control risk, audit risk, and detection risk?
a. As inherent risk goes up, audit risk goes up.
b. As inherent risk goes up, audit risk goes down.
c. As control risk goes up, detection risk goes up.
d. As control risk goes up, inherent risk goes down.

4. Which of the following statements is true regarding the concept of detection risk?
a. After assessing inherent and control risk and determining the level of acceptable audit risk, the auditor determines detection risk.
b. Detection risk is under the control of the auditor, and the level of audit effort that the auditor expends on the engagement depends on the level of detection risk.
c. When the risk of material misstatement is higher, detection risk is lower in order to reduce audit risk to an acceptable level.
d. The auditor controls detection risk through the nature, timing, and extent of substantive audit procedures.
e. All of the above are true.

5. Inherent risk is present in organizations at which of the following levels?
a. At the assertion level.
b. At the financial statement level in terms of business risk relating to operations.
c. At the financial statement level in terms of financial reporting.
d. All of the above.

6. Which of the following characteristics would lead the auditor to assess inherent risk relating to financial reporting at a higher level?
a. The account balance represents an asset that is relatively easily stolen.
b. The controls over the account balance are weak.
c. The company has a history of exactly meeting analyst estimates.
d. The company is in an industry that is mature and declining.

7. Which of the following statements is true regarding the concept of control risk?
a. When control risk is high, the auditor is concerned that a misstatement may not be prevented, or that if a misstatement exists in the organization's financial statements that it will not be detected, and therefore corrected by management.
b. Some organizations have zero control risk because they have made a significant commitment to the effective design and operation of controls.
c. Control risk relates to the susceptibility of an assertion to a misstatement, due to either error or fraud, before consideration of any related controls.
d. All of the above are true.