ACTG 3P11 Chapter Notes - Chapter 7-8: Audit Risk, Financial Statement, Risk Assessment

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purplerabbit340

30 Jan 2019

School

Brock University

Department

Business - Accounting

Course

ACTG 3P11

Professor

Sangeeta Hollo

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Document Summary

. 5 to . 10 of net income before tax. Amount that would affect reasonable user decision making. Level considered to have material effect on f/s. Allows for risk that there are undetected misstatements. Level for specific class of transactions, balance, or disclosure. Based on user sensitivity, and auditor"s desire for higher assurance or lower audit risk. Equal to or less than: performance or specific materiality. Used to evaluate results of testing (whereas performance or specific materiality is used to select sample/design procedures) Amounts that are so small/insignificant, not even posted to over/under schedule. Ex: rounding inventory calculations from 3 decimal places -> 2 decimal places. Risk that auditor will express an inappropriate opinion (will not correctly identify if f/s are materially misstated) Identify amount and types of evidence to reduce audit risk to an acceptable level. Level of audit risk the auditor is willing to accept (if not, decline/withdraw from engagement)

Related Questions

Question 2

You, a recent auditor with a local auditing firm, are responsible for the audit of a new client, PresentShop, a retailer of electronic home and office equipment in Western Canada.

PresentShop has 14 locations across Western Canada. It specializes in providing customers with the latest technology in home entertainment electronics such as televisions and DVD players as well as top of the line office technology such as computers.

The business was started 15 years ago in Alberta by two brothers who are still the only owners of the company. The brothers paid themselves a management bonus in 2017 of $60,000. The business has grown as a result of excellent advertising, good locations, and reasonable prices based on the ability of the company to buy in volume. Each store has a high degree of security such as electronic bars and video surveillance.

The accounting for the stores is all electronically performed. The sales tills are downloaded every day to the main office in Calgary which performs the accounting for all of the stores. The main office also has the warehouse from which all inventory is shipped to the stores.

Business has been relatively stable but the company does have pressure from American competitors moving into Canada as well as another Western Canadian competitor, B&C Sound. As well, the business tends to fluctuate with the economic cycles so recent government cutbacks in B.C. have resulted in lower sales. As a result of a decrease in profits, the company requires a significant loan from a bank and the bank has requested audited financial statements. It is the first year that the financial statements have been audited. The bank intends to use the inventory as collateral for the loan.

PresentShop has provided you with the following financial information for the years ending December 31, 2017:

	December 31, 2017 (â000s)
Total assets	$48,900
Total revenues	$124,900
Total net income before tax	$23,500
Total net income after tax	$15,400

Required:

Assess inherent risk at the overall financial statement level. Conclude on inherent risk. Is it low, medium or high?

Assess control risk at the overall financial statement level. Conclude on control risk. Is it low, medium or high?

Conclude on detection risk and the level of substantive testing required.

Assess overall (planning) materiality

Question 3

Explain the approach adopted by auditors of identifying accounts and related assertions at risk of material misstatement. How does this approach help auditors to reduce audit risk to an acceptably low level?

Question 4

What is the relationship between materiality and audit risk?

viridiangiraffe229

Which of the following statements is most correct regarding the independent auditor's reliance on the tests of controls performed by the internal auditors to reduce their substantive testing?

1-The independent auditor must obtain assurance of the independence of the internal auditors but need not test their work.

2-It is not acceptable for the independent auditor to rely upon the work of the internal auditors.

3-There are no restrictions in relying upon the work of internal auditors.

4-The independent auditor must evaluate the competency and objectivity of the internal auditors and must test a sample of the work of the internal auditors in order to rely upon their work.

The term "materiality" as used in auditing is best described as the

1-substance of the auditing procedures.

2-amount of misstatement on the financial statements that would influence a decision maker.

3-underlying evidence upon which the audit opinion is based.

4-amount of material the auditor gathers as evidence to support the audit opinion.

Prior to accepting an audit client an auditor has a professional obligation to

1-contact the predecessor auditor.

2-perform preliminary analytical review procedures.