Below are 10 independent risk factors:
1. The client is one of the industry’s largest based on its size and market share.
2. The company is publicly traded.
3. The client fails to reconcile bank accounts to recorded cash balances.
4. The audit program omits several necessary audit procedures.
5. The allowance for doubtful accounts is based on significant assumptions made by management.
6. The client engages in several material transactions with entities owned by family members of several of the client’s senior executives.
7. The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated.
8. The client lacks sufficient working capital to continue operations.
9. The auditor identified numerous material misstatements during prior-year audit engagements.
10. The client fails to detect employee theft of inventory from the warehouse because
there are no restrictions on warehouse access and the client does not reconcile inven- tory on hand to recorded amounts on a timely basis.
Identify which of the following audit risk model components relates most directly to each
of the ten risk factors:
• Acceptable audit risk
• Control risk
• Inherent risk
• Planned detection risk
Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. In each of the events a. through j., circle one letter for each of the three independent variables and planned evidence: I = increase, D = decrease, N = no effect, and C = cannot determine from the information provided.
a. The client changed from a privately held company to a publicly held company:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
