chapter 7 arens- answers to review questions

chapter 7 arens- answers to review questions - Review...

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Review Questions 7-1 The audit risk model is as follows: PDR = AR / (IR x CR) Where PDR = Planned detection risk AR = Audit risk IR = Inherent risk CR = Control risk Planned detection risk: a measure of how willing the auditor is to accept that the audit evidence to be obtained for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. Audit risk: a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. Inherent risk: a measure of the auditor’s expectation that a misstatement exceeding a tolerable amount exists in a segment before considering the effectiveness of internal accounting control. Control risk: a measure of the auditor’s expectation that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the clients’ internal control. 7-2 An increase in planned detection risk may be caused by an increase in audit risk or a decrease in either control risk or inherent risk, i.e., less evidence needs to be collected. A decrease in planned detection risk may result when added assurance is needed, i.e., control risk or inherent risk has increased, or the auditor has chosen to decrease audit risk. 7-3 The auditor considers client business risk during pre-planning (i.e. client acceptance or continuance) as well as throughout the audit, with primary emphasis in the planning phase of the audit. The auditor considers client business risk to decide whether the going concern principle applies for the engagement. 7-4 Engagement risk (the risk that the auditor will suffer harm because of the audit engagement, such as by being sued by one of the client’s stakeholders) increases if the client is in poor financial condition, or if there are more users of the financial statements. The auditor could incorporate these issues into the audit by lowering audit risk, resulting in the need to gather more evidence. 7-5 Inherent risk is set for segments rather than for the overall audit because misstatements occur in segments. By identifying expectations of misstatements in segments, the auditor is thereby able to modify audit evidence by searching for misstatements in those segments.
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This note was uploaded on 02/19/2012 for the course ACCT Audit taught by Professor Niki during the Spring '12 term at Saint Mary's University Texas.

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chapter 7 arens- answers to review questions - Review...

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