5. In class, we discussed the notion of an audit philosophy of tests of accounts

Question

5. In class, we discussed the notion of an audit philosophy of tests of accounts for overstatement and understatement to gain audit efficiencies. Consider the following statemen ts: I. Wh en the inventory purchases account is tested directly for OVERstatement, then conceptually, is being tested also indirectiy for UNDERstatement When the sales revenue account' is tested directly for ONDERstatement, then conceptually, accounts receivable is being tested also indirectly for UNDERstatement. accounts payable 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 the achieved audit risk is .05, the inherent risk is .60, and the control risk is .30. The calculation of detection risk would round to: b. .05 d. .28 f. none of the above . The answer is Answer .01 . 18 . 90 . 7. Consider the following statements: I. A basic sense of materiality would be "something is material if it would affect a decision maker's decision. II. When considering a preliminary judgment of materiality, if the auditor sets a LOWER dollar amount for materiality, rather than a HIGHER dollar amount evidence (i.e. substantive testing) is required. , MORE 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.

Explanation / Answer

Question 5 is Option C

I.When Purchases occurs on credit then journal entry is

Purchases A/c Dr

To Accounts Payable A/c

(Being purchases has been made)

Given in the statement that when purchases are shown for overstatement,the accounts payable will be understated

Since Purchases and Accounts Payables are directly related as purchases are overstated the Accounts payable will also be overstated

Hence I is false

In another situation when only purchases is overstated and Accounts payable is not changed it cannot happen because for every debit there will be sufficient debit

II.When Sales are occurred

Accounts Receivable A/c Dr

To Sales A/c

(Being Credit sales has been made)

If the sales revenue is understated then Accounts receivable will aslo be understated.

Hence II is true

Question 6

Audit Risk 0.05

Inherent risk 0.6

Control Risk 0.3

Detection risk risk is one of the elements that comprises of Audit risk,Inherent risk and control risk

Basically

Audit Risk=Inherent risk*Control Risk*Detection Risk

Hence Detection Risk=Audit Risk/(Inherent Risk*Control Risk)

DR=0.05/0.3*0.6

=0.05/0.18

=0.28

Hence d is correct

QUestion 7

Correct option is a

Both are true

I.Materiality amount is in a nature of amount or transaction that may influence the decisions of a user either financially or non-financially

IIIf the amount of materiality is lower the transactions increases and more evidence need to be collected and verified.

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