5. Consider the following statements: I. Conceptually, the auditor will do enough audit work in an account

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5. Consider the following statements:

I. Conceptually, the auditor will do enough audit work in an account to discover misstatements which individually, or in total exceed the amount of tolerable misstatement assigned to the account.

II. Materiality is considered to have two dimensions: Quantitative and conceptual.

a. I is true; II is true.

b. I is true; II is false.

c. I is false; II is true.

d. I is false; II is false.

Answer _____

6. Assume that from a quantitative sense the auditor would consider overall materiality to be one percent of total assets or $300,000. Further assume that the company has an existing Debt covenant of a current ratio of 2.0 or higher. A second covenant states that working capital should be $200,000 or higher. If either covenant is violated, then the debt could be called immediately, resulting in the company’s bankruptcy. Reported current assets are $440,000 while reported current liabilities are $210,000. Current liabilities have been audited. The auditor is satisfied with the number for current liabilities. Considering debt covenants as a qualitative materiality factor as discussed in class, the auditor would likely set materiality for current assets at

a. $ 10,000

b. 20,000

c. 30,000

d. 300,000

e. None of the above. The answer is ____.

Answer _____

7. Consider the following statements:

I. Analytical procedures can be used in the preliminary phase of an audit to suggest areas, or accounts which should receive more attention during the audit.

II. If one is looking for “The lack of expected fluctuations”, then one would tend to believe that the current year’s results will look similar to the past year’s results.

a. I is true; II is true.

b. I is true; II is false.

c. I is false; II is true.

d. I is false; II is false.

Answer _____