ASSIGNMENT
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 inventory 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
b. The auditor decided to set assessed control risk at the maximum (it was previously assessed below the maximum):
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
c. The client acquired a new subsidiary located in Italy:
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
d. The account balance increased materially from the preceding year without apparent reason:
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
e. You determined through the planning phase that working capital, debt-to-equity ratio, and other indicators of financial condition improved during the past year:
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
f. The client’s management materially decreased long-term contractual debt:
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
g. The client began selling products online to customers through its website during the year under audit. The online customer ordering process is not integrated with the company’s accounting system. Client sales staff print out customer order information and enter those data into the sales accounting system:
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
h. This is the second year of the engagement, and there were few misstatements found in the previous year’s audit. The auditor also decided to increase reliance on internal control:
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
i. In discussions with management, you conclude that management is planning to sell the business in the next few months. Because of the planned changes, several key accounting personnel quit several months ago for alternative employment. You also observe that the gross margin percent has significantly increased compared with that of the preceding year:
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
j. There has been a change in several key management personnel. You believe that management is somewhat lacking in personal integrity compared with the previous management. You believe it is still appropriate to do the audit:
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
