College of Accounting Education

3F Facundo Hall, Business and Engineering Building

Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

Reference:
a. PSA 320 – Materiality in planning and performing an audit

1. Which of the following is correct regarding the concept of materiality of financial information?
a. Misstatement, including omissions, are considered to be material if they, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of management
taken on the basis of the financial statements.
b. Judgments about materiality are made in the light of surrounding circumstances, and are
affected by the size (amount or quantitative) or nature (qualitative) of a misstatement, or a
combination of both.
c. Judgments about matters that are material to users of the financial statements are based on a
consideration of specific individual users, whose needs may vary widely.
d. All of the above.

2. Materiality is a matter of professional judgment influenced by the needs of

a. Management of the entity.
b. Users of the financial statements.
c. Auditors of the financial statements.
d. Regulatory bodies.

3. Which one of the following statements is incorrect concerning the concept of materiality?
a. Materiality is determined by references to guidelines established by the AASC and PICPA.
b. Materiality is depends on the size and nature of an item or misstatement relative to other items
in the financial statements.
c. Materiality threshold may change between the planning and review stages of an audit.
d. Materiality is a matter of professional judgment.

4. Which of the following is/are correct?

I. The auditor shall determine materiality for the financial statements as a whole.
II. If there is one or more particular classes of transactions, account balances or disclosures for
which misstatements of greater amounts than materiality for the financial statements as a whole
could reasonably be expected to influence the economic decisions of users taken on the basis of
the financial statements, the auditor shall determine the materiality level or levels to be applied
to those particular classes of transactions, account balances or disclosures.
III. Performance materiality shall be determine for the purposes of assessing the risks of material
misstatement and determining the nature, timing and extent of further audit procedures.

a. I and II only c. I and III only

b. II and III only d. All of the above.

5. Which of the following is not required to be documented by the auditor?

a. Materiality for the financial statements as a whole
b. If applicable, the materiality level or levels for particular classes of transactions, account
balances or disclosures
c. Performance materiality
d. All of the above are required to be documented.

6. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for
the financial statements as a whole. Factors that may affect the identification of an appropriate benchmark
include the following:
I. The elements of the financial statements
II. Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused
III. The nature of the entity
IV. The entity’s ownership structure and the way it is financed
V. The relative volatility of benchmark

a. I, II and III only c. I, II, III and IV only

 College of Accounting Education
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

b. I, III and V only d. All of the above

7. Which of the following is/are correct?

I. Performance materiality is set to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements in the financial statements exceeds
materiality relating for the financial statements as a whole.
II. Performance materiality relating to a materiality level determined for a particular class of
transactions, account balance or disclosure is set to reduce to an appropriately low level the
probability that the aggregate of uncorrected and undetected misstatements exceeds the
materiality level for that particular class of transaction, account balance or disclosure.

a. I only c. Both a and b.

b. II only d. Neither a nor b.

8. Which of the following statements is the most accurate.

a. Materiality for the financial statements as a whole should be set lower than materiality for
particular classes of transactions, account balances or disclosures.
b. Materiality for the financial statements as a whole should be set lower than performance
materiality.
c. Performance materiality should be set higher than materiality for the particular classes of
transactions, account balances or disclosures.
d. Performance materiality should be set lower than materiality for the financial statements as a
whole and materiality for particular classes of transactions, account balances or disclosures.

9. The auditors must consider materiality in planning an audit engagement. Materiality for planning purpose
is:
a. The auditors’ preliminary estimate of the largest amount of misstatement that would be material
to any one of the client’s financial statements.
b. The auditors’ preliminary estimate of the smallest amount of misstatement that would be
material to any one of the client’s financial statements.
c. The auditors’ preliminary estimate of the amount of misstatement that would be material to the
client’s balance sheet.
d. An amount that cannot be quantitatively stated since it depends on the nature of the item.

10. In considering materiality for planning purposes, an auditor believes that misstatements aggregating 1%
of the total assets, where total assets is P1,000,000 would have a material effect on an entity’s balance
sheet, but that misstatements would have to aggregate 5% of gross margin, where gross margin is
P4,000,000 to materially affect the income statement. Ordinarily, it would be appropriate to design
auditing procedures that would be expected to detect misstatements that aggregate
a. P100,000 c. P200,000
b. P150,000 d. P300,000

11. The concept of materiality is applied in which of the following areas of audit of financial statements?

a. b. c. d.
Planning the audit Yes Yes Yes Yes
Designing risk assessment procedures Yes Yes Yes No
Designing further audit procedures Yes Yes Yes Yes
Designing additional procedures Yes No No Yes
Evaluating the results of procedures Yes Yes No No
Forming an opinion on the fairness of financial statements Yes Yes Yes Yes

12. If an auditor establishes relatively high level for materiality, then the auditor will not:
a. Accumulate more evidence than if lower level had been set.
b. Accumulate less evidence than if a lower level had been set.
c. Perform tests of controls.
d. Perform substantive tests of details, substantive analytical procedures, and substantive tests of
balances.
 College of Accounting Education
3F Facundo Hall, Business and Engineering Building
Matina Campus, Davao City
Telefax: (082)305-5456
Phone No.: (082)300-5456 Local 137

13. Which of the following statements is true with regard to the relationship among audit risk, audit evidence,
and materiality?
a. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
b. Under conditions of high inherent and control risk, the auditor should place more emphasis on
obtaining external evidence and should reduce reliance on internal evidence.
c. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
d. Aggregate materiality thresholds should not change under conditions of changing risk levels.

14. Which of the following statements is incorrect relating to evaluating misstatements and findings
identified by the auditor?
a. The auditor should consider the individual effects of misstatements not corrected by the entity.
b. The auditor should consider the aggregate effects of misstatements not corrected by the entity.
c. The auditor should consider the likely misstatements, not only known misstatements.
d. The auditor should consider misstatements that are clearly trivial.