QUESTION 1

An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except:

1) Materiality should be reduced.

2) Risk of material misstatement should increase.

3) Detection risk should decrease.

4) Audit risk should increase.

QUESTION 2

All of the following are inherent risk factors that are pervasive to the financial statements except:

1) Highly complex significant transactions.

2) Non-routine transactions.

3) Classes of transactions are not processed systematically.

4) Supplies inventory is difficult to count.