Question

Question one Answer each of the following statements true or false. If it's false explain how the correct statement should be. (10 marks) i) If planned performance materiality is reduced, the amount of evidence the auditor accumulates will decrease. ii) If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high. ii) If the audit assurance rate or tolerable misstatement is 95%, then the level of acceptable audit risk is 10%. iv) A high detection risk equates to a low amount of audit evidence needed. v) When an auditor sets a low acceptable audit risk, it means that he wants to be more certain that the financial statements are not materially misstated. vi) As acceptable audit risk is decreased, the likely cost of conducting an audit decreases.

auditing

Answer 1

i) True

ii) False

Correct statement: ''If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high.''

Explanation: Planned detection risk is the risk that audit evidence will fail to detect misstatements that exceed a tolerable amount. An increase in planned detection risk may be caused by an increase in acceptable audit risk or a decrease in control risk or inherent risk.

iii) False

Correct statement: ''If the audit assurance rate or tolerable misstatement is 95%, then the level of acceptable audit risk is 5%.''

Explanation: Tolerable misstatements that the auditor allows is based on proportion of planning materiality for an audit. If the perceived risk level is high, the tolerable misstatement will be smaller percentage of planning materiality and vice versa.

iv) True

v) True

vi) False

Correct statement: ''As acceptable audit risk is decreased, the likely cost of conducting and audit increases .''

Explanation: Acceptable audit risk is the risk that auditor is willing to take of giving an unqualified opinion when the financial statements are materially misstated. As acceptable audit risk increases, the auditor is willing to collect less evidence (inverse) and therefore accept a higher detection risk.