ACCT3708 Tutorial Week 3

1124 Words Mar 15th, 2015 5 Pages
ACCT3708 Week 3 Tutorial
Q1. What is the link between audit risk and engagement risk? How does the audit risk model allow the auditor to deal with these risks in the most cost effective manner?
Audit risk is the risk that the auditor gives the wrong opinion – this can either be stating errors when there are none or when there are errors stating that there are none. This risk cannot be eliminated as auditors can only provide a reasonable assurance and not absolute, but instead this can only be managed and reduced to a minimum.
Engagement risk is the risk of the consequences of giving a wrong opinion to occur. Consequences include legal action against the auditor and loss of reputation of the auditor and lower fees charged.
The link
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It is material if it affects the user’s decisions. In general, the larger the error, the more material. There are items that are always material regardless of dollar amount, usually statutory requirements
2.
a. In the planning stage, the maximum error threshold is decided
b. Based on the threshold, measure whether it is material or not
c. Using materiality to determine whether the accumulated errors, are they large enough to justify an opinion
3. AASB 1031 materiality. Planning materiality and performance materiality – are only for auditors. Planning materiality – one base for the whole statement. For public companies – net profit since people are more focussed on that only if it is stable, if not pick total revenue or total assets. Used for financial statements as a whole.
4. Performance materiality is set lower than planning materiality. Used for testing individual items. Gives a buffer. i.e. inventory – cannot audit everything, so this lowers the chance of not picking material items.
Q6. XYZ Ltd is a publicly listed company which has suffered from major sales declines, due to increased foreign completion, and has made a succession of losses over the past three years. During the year, its CEO resigned and was replaced by Chief Operating Officer (COO). The trial balance reveals that sales were $10,000,000 and the company made a loss of $500,000. At what level

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