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Chapter02 - answer - CHAPTER 2 AUDIT PLANNING 2-1 Audit...

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2-1. Audit risk: The risk that the auditor may unknowingly fail to appropriately modify his/her opinion of financial statements that are materially misstated. Inherent risk: Relates to the susceptibility of an account balance or class of transactions to error that could be material. . .assuming that there were no related internal controls. Control risk: The risk that material errors or irregularities are not prevented or detected by the system of internal control. Detection risk: The risk that errors or irregularities which are not prevented or detected by the system of internal control, are not detected by the independent auditor. 2-2. Study of the business and industry, and application of analytical procedures during the planning stage of the audit assist in evaluating inherent risk. These procedures may permit the auditor to assess inherent risk below the initial 100% assumed level. 2-3. Sources of business and industry information are the following: a. Management inquiry b. Permanent audit workpaper file c. Internal client documents (e.g. correspondence files, minutes, accounting manuals, and policy and procedures manuals) d. PICPA audit and accounting guides e. Industry trade publications f. Government publications g. Credit reports (Dunn & Bradstreet, banks, etc.) h. Computer data bases i. Business periodicals 2-4. a. The audit risk model is Audit risk (AR) = Inherent risk (IR) x Control risk (CR) x Detection risk (DR) b. The audit risk model is useful in managing audit risk for assertions. By determining planned audit risk for an assertion, assessing inherent and control CHAPTER 2 AUDIT PLANNING
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2-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
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