? Materiality in Auditing:

Materiality refers to the significance of misstatements or omissions in financial statements that could influence the decisions of users relying on those statements.

During theplanning phaseof a financial audit, the auditor determines the dollar threshold for materiality based on professional judgment, considering the size and nature of the auditee’s operations and the needs of financial statement users.

? Why the Auditor Determines Materiality:

Theauditorhas the responsibility to form an independent opinion on the financial statements and must determine materiality thresholds to design audit procedures effectively.

Materiality thresholds guide the extent of testing and ensure the audit focuses on areas most likely to impact decision-making.

? Why Other Options Are Incorrect:

B. Auditee:The auditee provides the information, but it does not decide the materiality threshold.

C. Auditor in consultation with the auditee:The auditor may consult with the auditee for context, but the final determination is solely the auditor's responsibility.

D. Audit committee:While the audit committee oversees the audit, it does not set materiality thresholds.

? References and Documents:

GAAS (Generally Accepted Auditing Standards):States that materiality is determined by the auditor’s judgment.

AICPA AU-C Section 320:Provides guidance on materiality in planning and performing audits.

Creditworthiness and Loan Approval:

When creditworthiness is a criterion for government loans, the applicant must demonstrate asatisfactory history of repaying debt, as this reflects their ability to fulfill repayment obligations in the future.

? Why a Satisfactory History Is Required:

Past repayment behavior is considered the best indicator of future performance. Government agencies prioritize reducing the risk of defaults by ensuring applicants have a proven history of managing debt responsibly.

? Why Other Options Are Incorrect:

A. A credit rating from a major bank:While a credit rating is helpful, it is not typically required for government loans. Instead, creditworthiness is evaluated based on repayment history and other financial factors.

C. Sufficient capitalization:This is important for business loans, but it does not address creditworthiness.

D. A promise to pay interest at the government borrowing rate:A promise is not sufficient to establish creditworthiness.

? References and Documents:

OMB Circular A-129:Requires agencies to assess creditworthiness before granting loans.

GAO Loan Management Guide:Highlights repayment history as a key criterion for loan approval.

Deterrence of Fraud:

A primary deterrent to fraud is thefear of being caught. When individuals believe there is a high likelihood of detection, they are less likely to commit fraudulent acts.

Strong internal controls, monitoring, and audits increase this fear and serve as effective deterrents.

Explanation of Answer Choices:

A. Delegation of responsibility without oversight: Incorrect. Lack of oversight increases the risk of fraud rather than deterring it.

B. The fear of detection: Correct. The fear of being caught is one of the most effective fraud deterrents.

C. Job satisfaction and sense of "team": While these contribute to a positive work environment, they do not directly deter fraud.

D. Performance of employee background checks: Background checks are a preventive measure but are less effective as a fraud deterrent compared to detection risk.