Step 4 estimate the combined misstatement in this

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Unformatted text preview: planning audit evidence requirements in the audit of inventory. For each situation, calculate planned detection risk. SITUATION 1 2 3 4 1% 10% 10% 5% Inherent risk 100% 100% 50% 20% Control risk 100% 100% 40% 30% Planned detection risk ______ ______ ______ Acceptable audit risk Answer: 1. 1%; 2. 10%; 3. 50%; 1-172 4. 83.3% ______ 68. easy Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, tolerable misstatement, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged. decrease increase decrease decrease decrease 1. 2. 3. 4. 5. 69. medium Match nine of the terms (a-i) with the definitions provided below (1-9): a. b. c. d. e. f. g. h. i. An increase in acceptable audit risk. An increase in inherent risk. A decrease in control risk. An increase in planned detection risk. An increase in tolerable misstatement. . . . . . Business risk Preliminary judgment about materiality Inherent risk Planned detection risk Audit assurance Acceptable audit risk Tolerable misstatement Control risk Materiality d 1. A measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. a 2. The risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct. h 3. A measure of the auditor’s assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client’s internal controls. f 4. A measure of how much risk the auditor is willing to take that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued. g 5. The materiality allocated to any given account balance. b 6. The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users. e 7. This term is synonymous with acceptable audit risk. i 8. The magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person would have been changed. c 9. A measure of the auditor’s assessment of the likelihood that there are material misstatements before considering the effectiveness of internal control. 1-173 70. medium In practice, auditors rarely assign numerical probabilities to inherent risk, control risk, or acceptable audit risk. It is more common to assess these risks as high, medium, or low. For each of the four situations below, fill in the blanks for planned detection risk and the amount of evidence you would plan to gather (“planned evidence”) using the terms high, medium, or low. SITUATION 1 2 3 4 Acceptable audit risk Low Low High High Inherent risk High Low Low Low Control risk High Low Medium Low Planned detection risk ______ ______ ______ ______ Planned evidence ______ ______ ______ ______ Answer: 1. 2. 3. 4. low, high medium, medium medium, medium high, low 71. easy a The auditor’s preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users. a. True b. False 72. easy a There is no precise definition of materiality in the professional literature. 73. easy b The FASB definition of materiality focuses on potential users of financial statements. a. True b. False 74. easy a Net income before taxes is normally the most important base for deciding materiality. a. True b. False 75. easy b Most practitioners allocate the preliminary judgment about materiality to income statement accounts. a. True b. False 76. easy a The primary purpose of allocating the preliminary judgment about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate. a. True b. False a. b. True False 1-174 77. easy b Auditors cannot use prior year financial statement balances to establish their preliminary judgment about materiality in planning the current year’s audit. a. True b. False 78. easy b If acceptable audit risk is low, and inherent risk and control risk are both high, then planned detection risk should be high. a. True b. False 79. easy a Inherent risk and planned detection risk are inversely related; i.e., as inherent risk increases, planned detection risk should decrease, ceteris paribus. a. True b. False 80. easy b Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus. a. True b. False 81. easy b The most important element of the audit risk model is control risk. a. True b. False 82. easy b For a private company client, auditors are required to test any internal controls they believe have not been operating effectively during the period under audit. a. True b. False 83. easy a If an audito...
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This note was uploaded on 02/04/2014 for the course ACCOUNTING 211 taught by Professor Alikapur during the Fall '13 term at American University of Sharjah.

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