Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
1. Materiality relates to the significance or importance of an item.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
2. Auditors and management should agree on what is considered material.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
3. Clearly trivial and not material are terms that can be used interchangeably.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
4. Auditors need to choose materiality amounts carefully because once a materiality judgment has been made, it
cannot be revised.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
5. As detection risk increases, the amount of evidence an auditor needs to obtain decreases.
a. True
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
b. False
ANSWER:
POINTS:
LEARNING OBJECTIVES:
STATE STANDARDS:
True
1
AUDT.JOHN.16.117 - Risks of Material Misstatement
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
6. When business risk is low, the auditor does not have a high concern about the ability of the organization to
operate efficiently.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
7. Only public companies have to be concerned with business risk.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
8. Touring a company’s plant offers much insight into potential audit issues.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
9. When a successor auditor contacts a company’s previous auditor, the successor auditor might obtain
information related to client management’s integrity.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
Cengage Learning Testing, Powered by Cognero
Page 2
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
United States - AK - AICPA BB-Critical thinking
10. News media and web searches can provide useful information related to client management’s integrity and
the risk of material misstatement in the financial statements.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
11. LEXIS is a public database where the existence of legal proceedings against a company or key members of
the company can be found.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
12. The purpose of the auditor‘s consideration of the effectiveness of internal controls is to determine the
nature, extent and timing of substantive testing.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
13. Trend analysis deals with the relationship between two or more accounts within the current-year.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
14. One potential limitation to using industry data in preliminary analytical procedures is that the data from the
client may not be directly comparable to the data of the industry.
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Page 3
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
a. True
b. False
ANSWER:
POINTS:
LEARNING OBJECTIVES:
STATE STANDARDS:
True
1
AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
15. Brainstorming sessions should be led by the engagement team.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
16. During the process of a brainstorming session, the focus is more on the quality of ideas generated rather
than the quantity of ideas generated.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-05 - LO: 07-05
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Analytical Procedures and Brainstorming Activities
17. The usual length of a brainstorming session is about four hours.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
18. If detection risk is low, the auditor is more willing to take a higher risk of the substantive audit procedures
not detecting a material misstatement.
a. True
b. False
ANSWER:
False
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Page 4
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
19. Detection risk is measured on a scale of 0% to 5%.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
20. A risk of material misstatement of 100% indicates that material misstatement is highly likely.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
21. The internal controls of an organization have no impact on the efficiency of an audit.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-06 - LO: 07-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Planning Audit Procedures to Respond to Assessed Risks of Material Misstatement
22. Ineffective internal controls result in higher risk of material misstatement in the financial statements than
effective internal controls.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
Cengage Learning Testing, Powered by Cognero
Page 5
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
United States - AK - AICPA BB-Critical thinking
23. A company’s history of exactly meeting analyst estimates is a factor which could lead auditors to assess
inherent risk at a higher level.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assessing Factors Affecting Inherent Risk
24. Internal controls that the auditor expects to rely on to reduce substantive testing must be tested.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
25. A detection risk of 90% would suggest that an auditor must perform extensive substantive audit testing.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-06 - LO: 07-06
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Responding to Identified Risks of Material Misstatement
26. Heightened risk of material misstatement causes the auditor to perform audit procedures closer to year end.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
Cengage Learning Testing, Powered by Cognero
Page 6
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
United States - AK - AICPA BB-Critical thinking
27. Audit procedures have to be announced or be completed at predictable times.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
28. All audit procedures must be completed before year end.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
29. When the risk of material misstatement is heightened, the auditor increases the extent of audit procedures
and requires more evidence.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
30. Inherent and control risks are risk controlled by the auditor.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Identifying and Assessing Risks of Material Misstatement
Cengage Learning Testing, Powered by Cognero
Page 7
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
31. A risk factor indicating a heightened risk of fraud would be considered a significant risk.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
32. The existence of one or more risk factors means that there is a material misstatement present.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
33. In most audits, materiality is most commonly expressed as a percentage of net income.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assessing Materiality
34. Auditors are only concerned with materiality for the financial statements as a whole.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
35. Tolerable misstatement is always less than or equal to performance materiality.
a. True
b. False
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Page 8
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
36. An immaterial misstatement is defined as one that is clearly inconsequential, whether taken individually or
in the aggregate and whether judged by any criteria of circumstance.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assessing Materiality
37. Performance materiality is used for assessing the risks of material misstatement and determining the nature,
timing, and extent of audit procedures to perform during the audit opinion formulation process.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
38. Tolerable misstatement is the amount of misstatement in an account balance that the auditor could tolerate
and still not judge the underlying account balance to be materially misstated.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
39. The lower the dollar amount of the performance materiality the more audit evidence is required.
a. True
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Page 9
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
40. A significant risk is the same as a material risk.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Identifying and Assessing Risks of Material Misstatement
41. If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit
evidence for that account than if tolerable misstatement were $100,000.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
42. The purpose of tests of controls are to provide reasonable assurance that internal controls are operating
effectively.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
43. The quick ratio is useful for analyzing inventory accounts.
a. True
b. False
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Page 10
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
ANSWER:
POINTS:
LEARNING OBJECTIVES:
STATE STANDARDS:
False
1
AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
44. Detection risk is controllable by the client.
a. True
b. False
ANSWER:
False
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
45. Insistence from the CEO that she must be present at all meetings between the audit committee and
internal/external auditors would cause auditors to assess inherent risk at a higher level.
a. True
b. False
ANSWER:
True
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
46. Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United
States and is not found in FASB Concepts Statement No. 2?
a. “amount of a misstatement or omission”
b. “in light of surrounding circumstances”
c. “probable that the judgement of a reasonable person”
d. “significantly altered the total mix of information available”
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-01 - LO: 07-01
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assessing Materiality
47. If $15,000 is considered to be material to the income statement, but $25,000 is material to the balance sheet,
the auditor should set overall materiality at which of the following dollar amounts?
a. $20,000
b. $25,000
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
c. $40,000
d. $15,000
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
48. Which of the following best describes the amount of misstatement an auditor is willing to accept and still
judge that an account balance is not materially misstated?
a. Tolerable misstatement.
b. Performance materiality.
c. A clearly trivial amount.
d. Significant risk.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
49. If materiality judgments change during the audit opinion formulation process, what happens to previous
audit decisions that were based on the evidence obtained using the initial material setting?
a. They need to be reassessed.
b. They need to be noted in the footnotes.
c. No action is required.
d. None of the above.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
50. Which item is correct concerning the risk of material misstatement?
a. Risk of material misstatement arises because audit procedures have been misapplied.
b. Risk of material misstatement can be controlled and changed by the auditor.
c. Risk of material misstatement must be assessed in non-quantitative terms.
d. Risk of material misstatement is controllable by the client.
ANSWER:
d
POINTS:
1
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Page 12
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Identifying and Assessing Risks of Material Misstatement
51. What is the nature of the relationship between risk of material misstatement and audit risk?
a. Direct.
b. None.
c. Correlational.
d. Inverse.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
52. Detection risk is affected by which aspects of substantive audit procedures?
a. Nature.
b. Timing.
c. Extent.
d. All of the above.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
53. Which of the following factors would lead an auditor to assess inherent risk at a higher level?
a. The account balance is easily determined without estimation.
b. The account balance is composed of a high volume of nonroutine transactions.
c. The account balance is composed of simple transactions.
d. All of the above would lead the auditor to assess a higher level of inherent risk.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assess Factors Affecting Inherent Risk
54. To learn more about a company and its inherent risks, auditors can use which of the following resources?
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Page 13
Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
a. Management inquiries.
b. Economic statistics.
c. Online searches.
d. Any of the above could be used.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
55. Which of the following is a reason a predecessor auditor can decline to reply to a firm’s current auditor?
a. Data is under court order.
b. They must always respond.
c. The client does not approve of confidential information being shared.
d. Both A and C are correct.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
56. Which of the following factors will result in control risk being assessed at a higher level?
a. Controls are well designed.
b. There is a lack of supervision of accounting personnel.
c. Accounting staff are well trained and educated.
d. The control environment is operating effectively.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.119 - Assess Factors Affecting Control Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
57. Which of the following are two frequently used preliminary analytical procedures?
a. Reasonableness tests and economic analyses.
b. Trend analyses and reasonableness tests.
c. Ratio analyses and economic analyses.
d. Ratio analyses and trend analyses.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
58. Which of the following best describes year-to-year comparisons of account balances?
a. Time analyses.
b. Reasonableness tests.
c. Ratio analyses.
d. Trend analyses.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
59. Which of the following ratios provide information about liquidity?
a. Net profit margin.
b. Current ratio.
c. Inventory turnover.
d. Sales to assets.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
60. Which of the following would be a reason that industry and client data were not directly comparable?
a. Broad industry.
b. Use of different accounting principles.
c. Neither of the above.
d. Both A & B are correct.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
61. Which of the following are common brainstorming session guidelines?
a. Freedom of expression.
b. Respectful communication.
c. Suspension of criticism.
d. All of the above.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
62. What is the main reason to establish guidelines for brainstorming sessions?
a. To not hurt feelings.
b. It is required by the SEC.
c. To encourage interactive and constructive group dialogue and idea exchange.
d. To pass information up to top-level management efficiently.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
63. What type of relationship exists between audit risk and detection risk?
a. Direct.
b. Inverse.
c. Indirect.
d. No relationship.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
64. What is the typical range for the setting of audit risk?
a. 1% - 10%
b. 1% - 5%
c. 0% - 5%
d. 0% - 10%
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
65. Which of the following would be the likely risk results from using a 1% level of detection risk?
a. High detection risk and low audit risk.
b. High detection risk and high audit risk.
c. Low detection risk and high audit risk.
d. Low detection risk and low audit risk.
ANSWER:
d
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
66. What is the typical range for the assessment of the risk of material misstatement?
a. 0% - 100%
b. 0% - 10%
c. 0% - 5%
d. 1% - 100%
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.121 - Decisions about Detection Risk and Audit Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
67. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?
a. Increases.
b. Decreases.
c. Stays the same.
d. Becomes less reliable.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
68. Which of the following statements best describes what is meant by setting control risk at100%?
a. Controls are effective.
b. Controls are relevant.
c. Controls are ineffective.
d. Cannot be determined from the information given.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
69. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of
direct testing performed by the auditor?
a. Increase in direct testing.
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
b. Decrease in direct testing
c. No change in direct testing.
d. Direct testing is not needed.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
70. Which of the following terms best describes the numerical depiction of the relationship between control
risk, inherent risk, detection risk, and audit risk?
a. Audit risk model.
b. Risk of misstatement model.
c. Significance model.
d. Materiality equation.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
71. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective,
which of the following tests are eliminated?
a. Substantive testing.
b. Tests of controls.
c. Tests of details of balances.
d. Substantive analytical procedures.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
72. Which of the following terms best describes the types and appropriateness of audit procedures used?
a. Nature of detection risk.
b. Material misstatement risk.
c. Nature of auditing procedures.
d. Nature of risk response.
ANSWER:
d
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
73. Appropriateness addresses which aspect of audit procedures?
a. Relevance.
b. Reasoning.
c. Reliability.
d. Both A & C.
ANSWER:
d
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
74. Which of the following best describes what is meant by the timing of risk response?
a. Where procedures are conducted.
b. When procedures are conducted.
c. How procedures are conducted.
d. Who conducts the procedures.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
75. What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?
a. Introduce unpredictability.
b. Confuse the client.
c. Gather information during different times of the year.
d. Finish the audit sooner.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
76. Which of the following approaches can be used to introduce unpredictability into the audit?
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
a. Assessing high risk accounts.
b. Performing procedures on an unannounced basis.
c. Performing the audit in the same location each year.
d. Selecting items that would normally be tested.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
77. What procedure has to be completed at or after the end of the period?
a. Assessment of control risk.
b. Engagement letter.
c. Evaluation of adjusting journal entries.
d. All procedures must be completed prior to period end.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
78. An increase in the risk of material misstatement would lead to which of the following responses?
a. Increase in the extent of auditing procedures.
b. Decrease in the extent of auditing procedures.
c. No change in the extent of auditing procedures.
d. No change in the extent of audit procedures.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
79. Which of the following risk factors suggests a heightened level of risk of material misstatement?
a. Having a stable product.
b. The departure of key personnel of a company.
c. Few immaterial related-party transactions.
d. Declining a merger with another company.
ANSWER:
b
POINTS:
1
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
80. Which of the following terms best describes the risk that audit procedures will fail to detect misstatements
exceeding tolerable misstatement?
a. Audit risk.
b. Control risk.
c. Detection risk.
d. Inherent risk.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-02 - LO: 07-02
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Identifying and Assessing Risks of Material Misstatement
81. As the risk of material misstatement increases, what happens with detection risk?
a. Medium increase.
b. Stay the same.
c. Decrease.
d. Severely increase.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
82. In which of the following situations will auditors typically rely on internal controls over financial reporting?
a. If control risk is assessed at a high level.
b. If the controls are determined to be designed and operating effectively.
c. If the clients asks the auditor to test controls.
d. If the controls are sufficient to increase control risk to an acceptable level.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-04 - LO: 07-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assess Factors Affecting Control Risk
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
83. The risk of material misstatement refers to which of the following?
a. Inherent risk.
b. Control risk and acceptable audit risk.
c. The combination of inherent risk and control risk.
d. Inherent risk and audit risk.
ANSWER:
c
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.117 - Risks of Material Misstatement
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
84. Which of the following statements is false?
a. Inherent risk is inversely related to the level of control risk.
b. Inherent risk is directly related to the amount of evidence required in account testing.
c. Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no
internal controls.
d. Inherent risk and control risk are assessed by the auditor and controlled by the client.
ANSWER:
a
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-03 - LO: 07-03
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assessing Factors Affecting Inherent Risk
85. Which of the following is a factor that would cause an increase in the assessment of control risk?
a. New products have uncertain likelihood of success
b. Little interaction between senior management and operating staff
c. A new business strategy is improperly implemented.
d. The industry is mature and declining.
ANSWER:
b
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.07-04 - LO: 07-04
NATIONAL STANDARDS: United States - BUSPORG: Analytic
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AICPA BB-Critical thinking
TOPICS:
Assessing Factors Affecting Control Risk
86. Qualitative reasons for materiality
List the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative
reasons.
ANSWER:
The SEC provides guidance when a quantitatively small misstatement may still be
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
considered material due to qualitative reasons. These reasons include:
∙ The misstatement hides a failure to meet analysts’ consensus expectations for the
company.
∙ The misstatement changes a loss into income, or vice versa.
∙ The misstatement concerns a segment or other portion of the company’s business that
plays a significant role in the company’s operations or profitability.
∙ The misstatement affects the company’s compliance with regulatory requirements.
∙ The misstatement affects the company’s compliance with loan covenants or other
contractual requirements.
∙ The misstatement has the effect of increasing management’s compensation.
∙ The misstatement involves the concealment of an unlawful transaction.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
87. Inherent risk
List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level.
ANSWER:
Factors that would lead an auditor to assess inherent risk relating to operations at a
higher level include:
∙ The company lacks personnel or expertise to deal with the changes in the industry.
∙ New products and service offerings have uncertain likelihood of successful introduction
and acceptance by the market.
∙ The use of information technology is incompatible across systems and processes.
∙ Expansion of the business for which the demand for the company’s products or services
has not been accurately estimated.
∙ A new business strategy is incompletely or improperly implemented.
∙ Financing is lost due to the company’s inability to meet financing requirements.
∙ New regulatory requirements increase legal exposure.
∙ Alternative products, services, competitors, or providers pose a threat to current
business.
∙ There are significant supply chain risks.
∙ The production and delivery processes are complex.
∙ The industry is mature and declining.
∙ The organization lacks ability to control costs with the possibility of unforeseen costs.
∙ The organization produces products that have multiple substitutes.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
88. Brainstorming
What are the steps of the brainstorming process?
The steps of the brainstorming process are:
ANSWER:
1. Review prior year client information.
2. Consider client information, particularly with respect to the fraud triangle.
3. Integrate information from steps 1 and 2 into an assessment of the likelihood of fraud in
the engagement.
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
4. Identify audit responses to fraud risks.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.120 - Preliminary Analytical Procedures and Brainstorming
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
89. Risk Responses
When considering risk responses, what steps should the auditor take?
An auditor should do the following when considering risk responses:
ANSWER:
1. Evaluate the reasons for the assessed risk of material misstatement.
2. Estimate the likelihood of material misstatement due to the inherent risks of the
client.
3. Consider the role of internal controls, and determine whether control risk is
relatively high or low, thereby determining whether the auditor should rely on
controls (thereby necessitating tests of controls) or whether the auditor needs to
conduct a more substantive audit.
4. Obtain more relevant and reliable audit evidence as the auditor’s assessment of the risk
of material misstatement increases.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
90. Importance of materiality judgments
Explain the differences between performance materiality and tolerable misstatement.
ANSWER:
Performance materiality refers to the amount or amounts set by the auditor at less
than the materiality level for the financial statements as a whole or for particular
classes of transactions, account balances, or disclosures. If the auditor plans the
audit only to detect individual material misstatements, the auditor would be
overlooking the fact that the aggregate of individually immaterial misstatements
can cause the financial statements as a whole to be materially misstated.
Performance materiality is used for assessing the risks of material misstatement
and determining the nature, timing, and extent of audit procedures to perform
during the audit opinion formulation process. If performance materiality is set too
high, the auditor might not perform sufficient procedures to detect material
misstatements in the financial statements. If performance materiality is set too low,
the auditor might perform more substantive procedures than necessary.
Performance materiality is different from, but relates to, the concept of tolerable
misstatement.
Tolerable misstatement is the amount of misstatement in an account balance that
the auditor could tolerate and still not judge the underlying account balance to be
materially misstated. Tolerable misstatement is the application of performance
materiality to a particular sampling procedure, so it is always less than or equal to
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Chapter 7 - Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
performance materiality.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.116 - Material Misstatement and Importance of Materiality
Judgments
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
91. Relationships between risks
Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will
affect planned audit evidence.
Audit risk,
∙ Inherent risk,
∙ Control risk,
∙ Detection risk,
∙ Tolerable misstatement
ANSWER:
An increase in audit risk decreases planned evidence.
An increase in inherent risk increases planned evidence.
An increase in control risk increases planned evidence.
An increase in detection risk decreases planned evidence.
An increase in tolerable misstatement decreases planned evidence.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.122 - Respond to the Assessed Risks of Material Misstatement
and Plan Audit Procedures
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
92. Predecessor auditor
Discuss the required communications between predecessor and successor auditors.
ANSWER:
Auditing standards require a successor auditor to communicate with the
predecessor auditor whenever accepting a client that has been previously audited.
The purpose of the communication is to help the successor auditor evaluate
whether to accept the engagement. While the initiation of communication rests
with the successor auditor, the predecessor auditor must respond to the request for
information. However, because of the requirements that related to confidentiality,
the predecessor must obtain the former client’s permission prior to providing
information.
POINTS:
1
LEARNING OBJECTIVES: AUDT.JOHN.16.118 - Assess Factors Affecting Inherent Risk
STATE STANDARDS:
United States - AK - AACSB-Analytical skills
United States - AK - AACSB-Communication skills
United States - AK - AICPA BB-Critical thinking
Cengage Learning Testing, Powered by Cognero
Page 25