Chat with AIExam 7: Materiality and Risk
Big Box Distribution Company has an in-house information systems department of 50 people. The company generally does its own programming, although some software was acquired as a software package. A software package was purchased for customer relationship management, which will be modified by the programming staff.
Procedures for implementing programs vary by department. All major changes are approved by the Management Information Systems steering committee. The committee is also given a list of the maintenance changes that are planned in the coming year. Some departments request that the data processing department handle testing, while other users are rather picky and want to do their own testing. Requirements are generally prepared in writing, although small maintenance changes may be handled verbally.
Required:
Assess inherent risk associated with program changes at Big Box.
(30) 
VerifiedInherent risks for programming errors are high.This means that there could be incorrect or unauthorized program changes, particularly for those departments where the information systems department handles all of the testing.
Reasoning:
The following behaviours increase the risks of unauthorized or incorrect program changes:
•Maintenance changes do not require independent approval (this means that anyone can initiate a program change).
•Maintenance changes may be made without a written request or may not be documented (same as above, it also means that program changes may be made without being documented or tested).
•Customized systems are in use; customized systems are used by only one business (i.e., Big Box)and tend to have less testing and documentation than packaged systems, meaning that there is a greater likelihood for program errors.
A) Explain how auditors use the audit risk model when planning an audit.
B) Describe the audit risk model and each of its components.
(37) Verified A)The audit risk model is used primarily for planning purposes in deciding how much evidence to accumulate in each cycle.The auditor decides an acceptable level of audit risk, assesses inherent risk and control risk, and then uses the relationship depicted in the following model to determine an appropriate level for detection risk, so as not to provide an unqualified opinion when material errors do in fact exist in the financial statements:
PDR =
B)The planning form of the audit risk model is stated as follows:
PDR =
where: PDR = planned detection risk
AR = audit risk
IR = inherent risk
CR = control risk
Detection risk is a measure of the risk that audit evidence for an account will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.Detection risk determines the amount of substantive evidence that the auditor plans to accumulate.
Audit risk is 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.It is influenced primarily by the degree to which external users will rely on the statements, the likelihood that a client will have financial difficulties after the audit report is issued, and the auditor's evaluation of management's integrity.
Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of internal control.
Control risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in an account will not be prevented or detected by the client's internal controls.
If audit risk is increased, what happens to detection risk?
(30) VerifiedD
A PA recently finished the audit of a family-owned business. Now she is working on a large client with about 50 times the assets and 30 times total revenue. For the larger client, the PA will likely have
(43) As the effectiveness of internal control increases, what happens to control risk?
(43) The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?
(33) If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be
(44) The purpose of allocating planning materiality to balance sheet accounts is to
(31) When inherent risk is assessed as higher (i.e. more material errors are likely to exist) and control risk is assessed the same from one year to the next, what is the likely effect on detection risk?
(26) With respect to clients, business risk increases when conditions, events, circumstances or inactions
(26) Which of the following types of misstatements has the highest level of certainty?
(33) Senior management of Mega Corp. is entitled to receive large bonuses if they achieve earnings targets. What is the effect of this on the risks associated with recording of revenue?
(40) Discuss three factors that affect client business risk and therefore audit risk.
(41) Which of the following would be a signal of possible problems with management integrity?
(39) When the auditor has the same level of willingness to risk that material errors will exist after the audit is finished for all five cycles,
(32) Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is
(42) All other factors held constant, if the auditor decreases audit risk then
(35) 
Filters
- Essay(0)
- Multiple Choice(0)
- Short Answer(0)
- True False(0)
- Matching(0)