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conversation between two senior auditors regarding the audit risk model.

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A staff auditor was listening to a conversation between two senior auditors regarding the audit risk model. Following are some statements made in that conversation regarding the audit risk model.;Indicate whether you agree or disagree with each of the statements. Present the rationale for your answer.;(Audit Risk Model) A staff auditor was listening to a conversation;between two senior auditors regarding the audit risk model. Following;are some statements made in that conversation regarding the audit risk;model.;Indicate whether you agree or disagree with each of the statements.;Present the rationale for your answer. (Short but direct Rationale, I;am preparing for a similar test and want to review the subject);Audit risk can be applied quantitatively or qualitatively. In essence;it is a concept used to ensure that the auditor gathers sufficient;evidence to render an opinion on the financial statements with little;likelihood of being wrong.;Setting audit risk at 5 percent is a valid setting for controlling audit;risk at a low level only if the auditor assumes that inherent risk is;100 percent, or significantly greater than the real level of inherent;risk.;Inherent risk may be very small for some accounts (for example, the;recording of sales transactions at a Wal-Mart). In fact, some inherent;risks may be close to 0.01 percent. In such cases, the auditor does not;need to perform direct tests of account balances if he or she can be;assured that inherent risk is indeed that low.;Control risk refers to both (a) the design of controls and (b) the;operation of controls. To assess control risk as low, the auditor must;gather evidence on both the design and operation of controls.;Detection risk at 50 percent implies that the direct test of the account;balance has a 50 percent chance of not detecting a material;misstatement.;Audit risk should vary inversely with engagement risk: The higher the;risk with being associated with the client, the lower should be the;audit risk taken.;In analyzing the audit risk model, it is important to understand that;much of it is judgmental. For example, setting audit risk is judgmental;assessing inherent and control risk is judgmental, and setting detection;risk is influenced by the individual risk preferences of the auditor.

 

Paper#25990 | Written in 18-Jul-2015

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