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Concept explainers
a)
Introduction: Potential risk is the risk which is an expected in an action by the Auditor. This risk is the damage factor to the genuineness of the operations of a client.
To Explain:The potential risk areas and explanation for these risk areas and the description of potential risk areas affecting the audit engagement.
b)
Introduction: Potential Skepticism is the alertness factor of the working style of an Auditor who is prepared to handle any probable misstatement during the course of audit.
To Explain:The data which compels the auditor to use professionalism level while exercising in audit.
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Chapter 7 Solutions
Bundle: Auditing: A Risk Based-Approach, Loose-leaf Version, 11th + MindTap Accounting, 1 term (6 months) Printed Access Card
- Imagine that you are a senior auditor and your firm has been selected to audit a medium-sized company with a single location. Describe the four phases of an audit and discuss the key factors that would help you determine how to plan the audit for this company. Provide specific examples. Determine both the relationship of risks in the planning of the audit and factors that influence those risks. Speculate on which type of risk creates the most uncertainty for the auditor and recommend at least two ways to plan the audit to mitigate those risks. Provide specific examples.arrow_forwardThe auditors use an analytical procedures during the course of an audit. The most important phase of performing these procedures is the: Vouching of all data supporting various rates, Investigation of significant variations and unusual relationships, Comparison of client-computed statistics with industry data on a quarterly and full-year basisarrow_forwardAfter a preliminary review of the clients, revenue and receipt transaction cycle, the auditor assessed the preliminary audit risk at a high level, which of the following additional procedures would the auditor most likely perform next: * a. Obtain evidence about the consistency of the application of the client's internal control procedures. b. Increase the overall audit materiality level. c. Perform extensive analytical procedures as substantive test at year-end. d. Increase the volume of evidence that will satisfy the auditor's sufficiency criteria. e. None of the abovearrow_forward
- An audit strategy sets the direction, timing, and scope of an audit. Based on your audit knowledge, which of the following would be included in the audit strategy document? Select one:a. A flowchart of the entity's internal control system.b. The decision as to the combination of substantive testing and tests of control that would be adopted.c. The number of sales transactions to be tested.d. The results of the interim testing of payroll.arrow_forwardAfter the audit planning procedures, your audit team decided to place the preliminary audit risk at a high level. Which of the following is correct? A. The risk the planned further audit procedures will not be able to detect misstatement should be increased. B. The auditors should plan set the timing of its extensive substantive testing at year-end. C. The audit materiality levels should be increased. D. The auditors should plan extensive substantive testing through analytical procedures.arrow_forwardAn auditor’s decision either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determined by the(1) availability of data aggregated at a high level.(2) relative effectiveness and efficiency of the tests.(3) timing of tests performed after the balance sheet date.(4) auditor’s familiarity with industry trends.arrow_forward
- Risk Assessment. This question consists of a number of items pertaining to an auditor’s risk analysis for a company. Your task is to tell how each item affects overall audit risk—that is, the probability of issuing an unmodified audit report on materially misleading financial statements. Bond, CPA, is considering audit risk at the financial statement level in planning the audit of Toxic Waste Disposal (TWD) Company’s financial statements for the year ended December 31, 2017. TWD is a privately owned company that contracts with municipal governments to remove environmental wastes. Audit risk at the overall financial statement level isinfluenced by the risk of material misstatements, which may be indicated by a combination of factors related to management, the industry, and the company.Required:Based only on the following information, indicate whether each of the following factors (items 1 through 15) would most likely increase overall audit risk, decrease overall audit risk, or have no…arrow_forwardThe following are various activities an auditor doesduring audit planning.1. Determine the likely users of the financial statements.2. Identify whether any specialists are required for the engagement.3. Send an engagement letter to the client.4. Tour the client’s plant and offices.5. Compare key ratios for the company to those for industry competitors.6. Review management’s risk management controls and procedures.7. Review accounting principles unique to the client’s industry.8. Identify potential related parties that may require disclosure.For each procedure, indicate which of the first four parts of audit planning the procedureprimarily relates to: (1) accept client and perform initial audit planning; (2) understandthe client’s business and industry; (3) assess client business risk; (4) perform preliminaryanalytical procedures.arrow_forwardThe auditor should document the overall audit strategy and the audit plan, including any significant changes made to the planned audit strategy during the audit engagement. The auditor may summarize the overall audit strategy in the form of a memorandum. What does not the memorandum encompass? O a. Timing of audit b. Key decisions regarding the overall scope c. Conduct of the audit d. Statement of changes in equityarrow_forward
- Auditors make materiality judgments during the planning/risk assessment phase of the audit to be sure they ultimatelygather sufficient evidence during the audit to provide reasonableassurance that the financial statements are free of material misstatements.The lower the materiality threshold that an auditorhas for an account balance, the more the evidence that the auditormust collect. Auditors often use quantitative benchmarks such as 1% of total assets or 5% of net income to determine whethermisstatements materially affect the financial statements, but ultimatelyit is an auditor’s individual professional judgment as towhether a given misstatement is or is not considered material.a. What is the relationship between the level of riskiness of theclient and the level of misstatement in an account balancethat an auditor would consider material? For example,assume that Client A has weaker controls over accountsreceivable compared to Client B (therefore, Client A is riskierthan Client B).…arrow_forwardTo obtain an understanding of a continuing client in planning an audit, an auditor most liky would; A. Perform test of details of transactions and balances B. Read internal audit reports. C. Read Specialized industry journals. D. Reevaluate the risks of material misstatementarrow_forwardasap Identify the primary audit objectives that auditors hope to accomplish by confirming a client's year-end accounts receivable. Explain the difference between "positive" and "negative" confirmation requests and discuss the quality of audit evidence yielded by each.arrow_forward
- Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage LearningAuditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub
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