You are currently planning the audit of ABC company. You have audited ABC for the previous five years. ABC is a technology company that is currently going through an IPO. Because of its inexperience complying with SOX 404 requirements, ABC still has very poor internal controls overall, although controls for sales are strong and have been found to operate effectively during interim testing. Most of its accounting procedures involve complex accounting and the heavy use of estimates. ABC is frequently featured in the financial press. Pre-tax income for the current year under audit is $10,000,000. ABC's largest and most challenging account balances are sales revenue ($143,000,000) and research and development expense ($25,000,000). Based on the information above, tolerable misstatement/performance materiality for R&D expense would be: 50% of overall/planning materiality 75% of overall/planning materiality 50% of the R&D account balance 75% of the R&D account balance Based on the information above, you would follow which overall strategy when testing the revenue account? Reliance strategy Substantive strategy Analytical strategy Disclaimer strategy

You are currently planning the audit of ABC company. You have audited ABC for the previous five years. ABC is a technology company that is currently going through an IPO. Because of its inexperience complying with SOX 404 requirements, ABC still has very poor internal controls overall, although controls for sales are strong and have been found to operate effectively during interim testing. Most of its accounting procedures involve complex accounting and the heavy use of estimates. ABC is frequently featured in the financial press. Pre-tax income for the current year under audit is $10,000,000. ABC's largest and most challenging account balances are sales revenue ($143,000,000) and research and development expense ($25,000,000). Based on the information above, tolerable misstatement/performance materiality for R&D expense would be: 50% of overall/planning materiality 75% of overall/planning materiality 50% of the R&D account balance 75% of the R&D account balance Based on the information above, you would follow which overall strategy when testing the revenue account? Reliance strategy Substantive strategy Analytical strategy Disclaimer strategy

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter4: Professional Liability, Auditor Judgment Frameworks, And Professional Responsibilities

Section: Chapter Questions

Problem 54RSCQ

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