1) The following are several multiple choice questions adapted from the CPA exam that cover the concept and application of materiality. For each question, selected the best answer and then explain why it is better than all the alternatives. Your explanations should address all the possible alternatives presented in the question.
a) Which one of the following statements is correct concerning the concept of materiality?
i) Materiality is determined by reference to guidelines established by the AICPA.
ii) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.
iii) Materiality depends on the nature of an item rather than the dollar amount.
iv) Materiality is a matter of professional judgment.
b) 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 to
c) A client decides not to record an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
i) The financial statements are free from material misstatement, and no disclosure is required in the notes to the financial statements.
ii) The financial statements do not conform with generally accepted accounting principles (GAAP).
iii) The financial statements contain unadjusted misstatements that should result in a qualified opinion.
iv) The financial statements are free from material misstatement, but disclosure of the proposed adjustment is required in the notes to the financial statements.
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