Multiple Choice Questions
The following questions deal with materiality. Choose the best response.
a. Which one of the following statements is correct concerning the concept of materiality?
(1) Materiality is determined by reference to guidelines established by the AICPA.
(2) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
(3) Materiality depends on the nature of an item rather than the dollar amount.
(4) Materiality is a matter of professional judgment.
b. Which of the following is not correct about materiality?
(1) The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with accounting standards, whereas other matters are not important.
(2) An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be considered material to any one of the financial statements.
(3) Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
(4) An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.
c. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity's income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate
(1) $10,000
(2) $15,000
(3) $20,000
(4) $30,000