a)
Introduction:Audit risk is the risk thatthe auditor mightdeclare an unqualified report due to his failure in detecting a material misstatement either due to error or fraud.
To state:that the audit risk should be considered at zero level for almost all the audit assignments.
Introduction:Inherent risk is the risk generated by an error or omission in a financial statement because of a factor other than failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex,or when the situations need a high level of judgment for the financial estimates.
To state:That the Inherent risk factor as low as zero level impacts the auditor for not going into detailed examination of the books of account.
Introduction:Control risk is the probability that financial statements are significantly wrong,because of failures in the
To state:That the auditor has to collect evidences on design as well as operations of controls, to assess the control risk at low level.
Introduction:Detection risk is the risk that auditor will not be able detect a misstatement that is found in the decision that could be significant, either individually or collectively.
To state:that detection risk at 50% means that the auditor can rely to the extent 50% about the existence of any material misstatement.
Introduction:Audit risk is the risk that the auditor might declare an unqualified report due to his failure in detecting a material misstatement either due to error or fraud.
To state:That audit risk vary in relation to inherent risk and control risk and has inverse relationship.
Introduction:Audit risk model is a technique which is used by auditors to assess the relationship between various risks generating from an audit assignment, which enables the auditor to manage the overall audit risk.
To state:that judgment of the auditor is a key factor while deciding about the audit risk model.
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Chapter 7 Solutions
Bundle: Auditing: A Risk Based-approach, 11th + Mindtap Accounting, 1 Term (6 Months) Printed Access Card
- When planning to perform an audit, an accountant must have a clear understanding of audit risk and its components. The existing audit risk components consist of: 1. Control Risk 2. Detection Risk 3. Inherent Risk For each of the following situations, determine the component of audit risk that exists and explain why. 1. The client failed to find fraud committed by his employees as early as possible because the client did not reconcile the bank balance every month. 2. The auditor's confirmation of accounts receivable failed to detect material misstatements in the sales and accounts receivable accounts. 3. Procedure for disbursement of money at the client which is carried out without the approval of the authorized officialarrow_forwardYou are the audit partner of ‘Power Auditors’ and you are auditing your client ‘FreefallIncorporated’.After finishing all the tests on the client’s financial information you determine that there is amaterial misstatement in the accounts receivable account of your client. This misstatementhas also caused the sales revenue account to be materially misstated. You have notified theclient about the misstatement but as of reporting date, client has not made any corrections.You also found misstatements in the fixed assets and accounts payable accounts, but theyare not material as per your assessment. You found no other misstatements in the otheraccounts.In addition to this, you also notice that the client has a large amount of debt which will bedue next year. As the business has suffered a loss this year and does not have enough cashflow at the end of the year to pay the debt next year, the client will need to secure someform of refinancing next year. Without this refinancing, there is a…arrow_forwardYour view of what the companies’ auditors would need to consider in the effective audit of its primary revenues. For example, what would you do to audit the revenue streams? How would you verify that they are correctly stated in the financial statements without material error? Identify no more than three audit procedures around revenue recognition for the company you selected.arrow_forward
Auditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning
Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College Pub