DISCUSSION QUESTIONS AND PROBLEMS
The following are concepts discussed in Chapter 8 and this chapter:
1. Preliminary judgment about materiality
7. Estimated total misstatement in a segment
2. Control risk 8. Planned detection risk
3. Risk of fraud 9. Estimate of the combined misstatement
4. Inherent risk 10. Significant risk
5. Risk of material misstatements 11. Acceptable audit risk
6. Known misstatement 12. Performance materiality Required
a. Identify which items are audit planning decisions requiring professional judgment.
b. Identify which items are audit conclusions resulting from application of audit procedures and requiring professional judgment.
c. Under what circumstances is it acceptable to change those items in part a. after the audit is started? Which items can be changed after the audit is 95 percent completed?
This problem requires you to access PCAOB Auditing Standard AS 2110, Identifying and Assessing Risks of Material Misstatements (pcaobus.org). Use this standard to answer each of the questions below. For each answer, document the paragraph(s) in AS 2110 supporting your answer.
a. What types of information does AS 2110 suggest the auditor should consider when
obtaining an understanding of the company and its environment?
b. What types of performance measurements might affect the risk of material
misstatement?
c. What specific issues should be included in the discussion among engagement team
members regarding the risk of material misstatement?
d. What factors should the auditor consider in determining whether a risk is a “significant risk”?
e. What guidance is provided about revising risk assessments as the audit continues?
Moranda and Sills, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assessment procedures. Based on inquiries and other information obtained, the auditors learned that the bank is finalizing an acquisition of a smaller community bank located in another region of the state. Management anticipates that the transaction will close in the third quarter, and, while there will be some challenges in integrating the IT systems of the acquired bank with Highland’s systems, the bank should realize a number of operational cost savings over the long term.
During the past year, the bank has expanded its online service options for customers,
who can transfer funds and make electronic payments from checking and savings
accounts. The system has been well received by customers and the bank hopes to con- tinue expanding those services. The challenge for Highland is that they are struggling to
retain IT personnel given the strong job market for individuals with those skills.
Credit risk management continues to be a challenge for all banks, including Highland,
and regulators continue to spend a lot of time on credit evaluation issues. The bank has a
dedicated underwriting staff that continually evaluates the collectibility of loans outstand- ing. Unfortunately, some of the credit review staff recently left the bank to work for a com- petitor. Competition in the community banking space is tough, especially given the slow
loan demand in the marketplace.
The bank has expanded its investment portfolio into new types of instruments subject
to fair value accounting. Management has engaged an outside valuation expert to ensure
that the assets are appropriately valued and reported.
Fortunately, the bank’s capital position is strong and it far exceeds regulatory
minimums. Capital is available to support growth goals in the bank’s 3-year strategic
plan.
a. Describe any risks of material misstatement at the financial statement level.
b. Describe any risks of material misstatement at the assertion level.
c. Which, if any, risks would be considered a significant risk?
