D251 WGU FINAL EXAM QUESTIONS AND
CORRECT ANSWERS!!
Your client's net income has fluctuated significantly in recent years due to startup costs.
This year, income is positive but modest. What's the most appropriate benchmark for
setting planning materiality?
Total revenues
Your initial planning materiality is $100,000. The client later restates net income to a much
lower amount. What should you do?
Reassess materiality and consider additional testing
A misstatement of $40,000 was found in an account with a tolerable misstatement of
$35,000. What is the auditor's next step?
Project the error to the population and consider further testing
A publicly traded company shows stable net income. Which of the following benchmarks is
most defensible?
Net income before tax
You identified multiple misstatements, each below performance materiality, but totaling
close to planning materiality. What should you consider?
Aggregated effect of uncorrected misstatements
Which best describes performance materiality?
The adjusted level of planning materiality for account-level testing
An error is clearly immaterial quantitatively, but relates to intentional fraud by
management. What is your conclusion?
Qualitative materiality must be considered
Which client characteristic would lower the materiality threshold?
,High user sensitivity to earnings
When do auditors reassess materiality?
When the financial benchmark changes significantly
Which of the following is most useful for evaluating qualitative materiality?
All of the above
Your audit client, GloNet Corp., just barely met analyst earnings expectations by $50,000.
During your testing, you discover a $60,000 uncorrected misstatement in advertising
expenses. This misstatement alone would have caused the company to miss its earnings
target.
The misstatement is material because it flips earnings guidance
You've found five uncorrected misstatements during the audit, each approximately
$18,000. Planning materiality is $100,000. None individually exceed performance
materiality, but they total $90,000 combined.
Aggregate the misstatements and assess them together
An immaterial $3,000 misstatement related to unearned revenue is found to be intentional
and approved by the CFO to "smooth earnings."
As a material misstatement due to qualitative factors
You're auditing a startup tech firm with erratic income and large revenue growth. The
current year shows a $100,000 net income but $12 million in total revenue. You're setting
planning materiality.
Total revenue
A $30,000 misstatement was found that would change the company's income from a small
loss to a small gain.
Qualitatively material due to trend reversal
, Your audit client has a strong internal control environment and a highly competent
accounting team. You're considering performance materiality.
No direct effect on materiality thresholds
Your client's financial reports are primarily used by bond rating agencies, who closely
monitor EBITDA instead of net income. The company has consistent positive EBITDA and
minimal tax effects.
EBITDA or revenue
You detect a $25,000 error related to discontinued operations. Materiality is $100,000, and
users are mainly focused on continuing operations.
Immaterial due to its location and size
Management insists that a $4,000 misstatement doesn't require correction because "it's
under $5,000 and not worth it."
Remind management that materiality is the auditor's responsibility
An uncorrected $60,000 misstatement is found in legal expense disclosures. Materiality is
$75,000. The item relates to a pending lawsuit, which management refused to disclose
further.
It is material due to potential litigation consequences
What is the purpose of setting performance materiality?
To reduce risk that misstatements in aggregate exceed materiality
Which is most likely to be used as a benchmark for a nonprofit?
Total revenues
Planning materiality is reassessed when:
Benchmark changes significantly
What is tolerable misstatement?
Performance materiality applied to individual accounts
CORRECT ANSWERS!!
Your client's net income has fluctuated significantly in recent years due to startup costs.
This year, income is positive but modest. What's the most appropriate benchmark for
setting planning materiality?
Total revenues
Your initial planning materiality is $100,000. The client later restates net income to a much
lower amount. What should you do?
Reassess materiality and consider additional testing
A misstatement of $40,000 was found in an account with a tolerable misstatement of
$35,000. What is the auditor's next step?
Project the error to the population and consider further testing
A publicly traded company shows stable net income. Which of the following benchmarks is
most defensible?
Net income before tax
You identified multiple misstatements, each below performance materiality, but totaling
close to planning materiality. What should you consider?
Aggregated effect of uncorrected misstatements
Which best describes performance materiality?
The adjusted level of planning materiality for account-level testing
An error is clearly immaterial quantitatively, but relates to intentional fraud by
management. What is your conclusion?
Qualitative materiality must be considered
Which client characteristic would lower the materiality threshold?
,High user sensitivity to earnings
When do auditors reassess materiality?
When the financial benchmark changes significantly
Which of the following is most useful for evaluating qualitative materiality?
All of the above
Your audit client, GloNet Corp., just barely met analyst earnings expectations by $50,000.
During your testing, you discover a $60,000 uncorrected misstatement in advertising
expenses. This misstatement alone would have caused the company to miss its earnings
target.
The misstatement is material because it flips earnings guidance
You've found five uncorrected misstatements during the audit, each approximately
$18,000. Planning materiality is $100,000. None individually exceed performance
materiality, but they total $90,000 combined.
Aggregate the misstatements and assess them together
An immaterial $3,000 misstatement related to unearned revenue is found to be intentional
and approved by the CFO to "smooth earnings."
As a material misstatement due to qualitative factors
You're auditing a startup tech firm with erratic income and large revenue growth. The
current year shows a $100,000 net income but $12 million in total revenue. You're setting
planning materiality.
Total revenue
A $30,000 misstatement was found that would change the company's income from a small
loss to a small gain.
Qualitatively material due to trend reversal
, Your audit client has a strong internal control environment and a highly competent
accounting team. You're considering performance materiality.
No direct effect on materiality thresholds
Your client's financial reports are primarily used by bond rating agencies, who closely
monitor EBITDA instead of net income. The company has consistent positive EBITDA and
minimal tax effects.
EBITDA or revenue
You detect a $25,000 error related to discontinued operations. Materiality is $100,000, and
users are mainly focused on continuing operations.
Immaterial due to its location and size
Management insists that a $4,000 misstatement doesn't require correction because "it's
under $5,000 and not worth it."
Remind management that materiality is the auditor's responsibility
An uncorrected $60,000 misstatement is found in legal expense disclosures. Materiality is
$75,000. The item relates to a pending lawsuit, which management refused to disclose
further.
It is material due to potential litigation consequences
What is the purpose of setting performance materiality?
To reduce risk that misstatements in aggregate exceed materiality
Which is most likely to be used as a benchmark for a nonprofit?
Total revenues
Planning materiality is reassessed when:
Benchmark changes significantly
What is tolerable misstatement?
Performance materiality applied to individual accounts
