An Auditor Knows That an Audit Client Operating in an Industry

question 17

Multiple Choice

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:

• A) Materiality should be reduced.
• B) Risk of material misstatement should increase.
• C) Detection risk should decrease.
• D) Audit risk should increase.

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Definitions:

Net Income

The final amount of profit a company makes after subtracting costs, taxes, and expenses from its gross revenue.

Fair Value

An estimated market value of an asset or liability based on current market prices or valuations.

Stock Investments

The purchase of shares in a company with the expectation of generating income or capital gains.

Insignificant Influence

Refers to a situation in which an investor does not have enough stake or power in an investee company to affect its decisions or policies.