AC410 Unit 3 Assignment 1.docx - Question Requiring Analysis 5-36 Marion Watson Co CPAs is planning its audit procedures for its tests of the valuation

AC410 Unit 3 Assignment 1.docx - Question Requiring...

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Question Requiring Analysis: 5-36 Marion Watson & Co., CPAs, is planning its audit procedures for its tests of the valuation of inventories of East Coast Manufacturing Co. The auditors on the engagement have assessed inherent risk and control risk for valuation of inventories at 100 percent and 50 percent, respectively. Required: a. Calculate the appropriate level of detection risk for the audit of this assertion, given that the auditors wish to restrict audit risk for the assertion to 3 percent. Inherent risk – 100% = 1 Control risk – 50% = 0.50 Audit risk – 3% = 0.03 Audit risk = Inherent risk x Control risk x Detection risk 0.03 = 1 x 0.50 x DR 0.03 = 0.50DR 0.03/0.50 = 0.50DR/0.50 0.06 = DR 6% Detection risk b. Calculate the appropriate level of detection risk for the audit of this assertion, given that the auditors wish to restrict audit risk for the assertion to 5 percent. Inherent risk – 100% = 1 Control risk – 50% = 0.50 Audit risk – 5% = 0.05 Audit risk = Inherent risk x Control risk x Detection risk 0.05 = 1 x 0.50 x DR 0.05 = 0.50DR 0.05/0.50 = 0.50DR/0.50 0.10 = DR 10% Detection risk
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Problem: 5-47 State whether each of the following statements is correct or incorrect concerning audit risk and its components—inherent risk, control risk, and detection risk. a. The risk of material misstatement is composed of the three components of audit risk.
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