A firm uses the audit risk model, AR=RMMxDR, to plan audit programs, as described below.
Audit Risk: The firm’s AR ranges, for any materiality amount, are:
VERY LOW 1% to <5%
LOW 5% to <10%
MODERATE 10% to 30%
HIGH Not permissible
These ranges are modified according to the type of risk, as described below.
If an auditor doesn’t specify a numerical risk level for AR, the auditor must specify a category (VL, L or M, but not H). The firm’s planning software will then assume that VL=1%, L=5% and M=10%.
Preliminary Risk of Material Misstatement, RMMp: This risk is based on the auditor’s judgment regarding the design effectiveness of the system in place. If the auditor doesn’t specify a risk level for RMMp, the auditor must specify a category (VL, L or M or H). The firm’s planning software will then assume that VL=5%, L=10%, M=30% and H=100%.
Risk of Material Misstatement, RMM: RMM is the auditor’s assessment of the operating effectiveness of controls, which is determined from the auditor’s tests of controls.
Detection Risk, DR: The auditor should specify a value for DR that is consistent with AR and RMM.
That is, DR = AR / RMM and is dependent on the auditor’s choices of AR and RMM. If application of the risk levels for AR and RMM, pursuant to the above guidelines, results in DR≥50%, then the auditor sets DR=50%. DR > 50% is not permissible under the firm’s guidelines.
Suppose the auditor specifies only the categories for AR and RMMp, not numerical values. Briefly explain the reason for the firm’s software planning tool setting AR to the low end of the range for each category and RMM to the high end of the range for each category.
A. The auditor sets AR to LOW, and RMM, the operating effectiveness, is found to be MODERATE. Calculate planned DR in accordance with the planning guideline.
B. The auditor sets AR to LOW, and RMM, the operating effectiveness, is found to be HIGH. Calculate planned DR in accordance with the planning guideline.
C. The auditor sets AR to MODERATE, and RMM, the operating effectiveness, is found to be LOW. Calculate planned DR in accordance with the planning guideline.
3. Assume that scope of the examination remains constant.
A. What effect does increasing the materiality amount have on DR?
B. What effect does increasing the materiality amount have on AR?
4. Assume that the operating effectiveness of controls, RMM, is determined.
A. If M is increased, but AR and DR are unchanged, what is the effect on the scope of the
examination? [Your answer should be either: enhanced, unchanged or reduced]
B. If scope is enhanced, but not AR, what is the possible effect on the amount of misstatement that could
be detected at that fixed level of AR? [This is equivalent to asking: What is the effect on m ?)
(please ans a,b& c)
A firm uses the audit risk model, AR=RMMxDR, to plan audit programs, as described below. Audit...
1. A. The auditor sets AR to LOW, and RMM, the operating effectiveness, is found to be MODERATE. Calculate planned DR in accordance with the planning guideline. B. The auditor sets AR to LOW, and RMM, the operating effectiveness, is found to be HIGH. Calculate planned DR in accordance with the planning guideline. C. The auditor sets AR to MODERATE, and RMM, the operating effectiveness, is found to be LOW. Calculate planned DR in accordance with the planning guideline.
If a company’s control risk is initially assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls. For each of the following control activities listed as (1)–(10), do the following two tasks: a. Describe the test of control that the auditor would use to determine the operating effectiveness of the control. b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control is not working as...
If a company’s control risk is initially assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls. For each of the following control activities listed as (1)–(10), do the following two tasks: a. Describe the test of control that the auditor would use to determine the operating effectiveness of the control. b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control is not working as...
If a company’s control risk is initially assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls. For each of the following control activities listed as (1)–(10), do the following two tasks: a. Describe the test of control that the auditor would use to determine the operating effectiveness of the control. b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control is not working as...
Control 2: If a company’s control risk is initially assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls. For the following control activity listed, do the following two tasks: a. Describe the test of control that the auditor would use to determine the operating effectiveness of the control. b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control is not working as planned. In...
Control 1: If a company’s control risk is initially assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls. For the following control activity listed, do the following two tasks: a. Describe the test of control that the auditor would use to determine the operating effectiveness of the control. b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control is not working as planned. In...
Review Garcia and Foster’s calculations of materiality thresholds for the 20X2 Audit . Determine if the auditors correctly applied the materiality concept in their risk assessment procedures. Describe any problems you find and provide suggestions for improvement. This question relates to step 2 of the Garcia and Foster Audit Plan. Step 2: Requires the audit team to obtain and document its understanding of the client’s environment including internal controls. This understanding allows auditors to identify significant risks in the audit...
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Review the Audit report (found in the 10-K) for the following two companies. Highlight or summarize differences between the reports (other than the name of Company, Audit Firm, Financial statement period covered). Note: 1. Each Company may have two audit reports (one opinion on financial statements and one for audit of internal controls) or the two opinions may be combined into one report. 2. You are not required to review the entire 10-K. Find the audit report in the 10-K...