9-11
9–30 (continued)
assessment, the auditor should revise the risk assessment and
9–31 a. Several of the recent developments at Highland Bank and Trust may
trigger risks of material misstatement at the financial statement level,
including the following:
The integration of the pending acquisition of the small community
bank into Highland’s operations and financial reporting processes
may trigger the potential for misstatements across a number of
Any challenges associated with the integration of IT systems of
The integrity and competency of personnel from the acquired bank
reporting.
The expansion of online service options for customers could
trigger risks across a number of accounts, given customers use
b. Several of the recent developments at Highland Bank and Trust may
trigger risks of material misstatement at the assertion level, including
the following:
The expansion of online service operations may affect the
9-12
9–31 (continued)
misstatements related to the posting and summarization
transaction–related audit objective may occur.
loan loss reserves.
The expansion into new types of investments subject to fair value
accounting where the bank does not have employees with the
appropriate valuation skills and competencies increases the risks
for investments.
c. Given the significance of these recent events, the risks noted in
answers to part a. and b. would most likely be deemed as significant
risks in the current year’s audit.
a. True. A CPA firm should attempt to use reasonable uniformity from
audit to audit when circumstances are similar. The only reasons
for having a different audit risk in these circumstances are the
b. True. Users who rely heavily upon the financial statements need
more reliable information than those who do not place heavy
reliance on the financial statements. To protect those users, the
are correctly stated.
c. True. The reasoning for c. is essentially the same as for b.
9-13
9–32 (continued)
9–33
audit risk.
by a single person.
management rather than the audit committee.
management positions.
audit risk.
on audit risk.
experience with the client.
8. Increase A change in the method of accounting increases the
method.
9. Increase The unusual transaction increases audit risk.
10. Decrease The resolution of the lawsuit decreases risk related
11. Increase Related party transactions increase audit risk.
effect on audit risk.
13. Increase The potential for improper revenue recognition
14. Increase A planned stock offering increases incentives to
9-14
9–34 a. Low, medium, and high for the four risks and planned evidence
have meaning only in comparison to each other. For example,
b. 1 2 3 4 5 6
Acceptable Audit Risk H H L L H M
c.
EFFECT ON PDR
EFFECT ON EVIDENCE
(1) Decrease
(2) Increase
(3) NA
(4) Increase
(5) No effect
Increase
Decrease
Increase
Decrease
No effect
opinion.
Inherent risk A measure of the auditor’s assessment of the
susceptibility of an assertion to material misstatement before
Control risk A measure of the auditor’s assessment of the risk
that a material misstatement could occur in an assertion and not
9-15
9–35 (continued)
Planned detection risk A measure of the risk that audit evidence
exceeding performance materiality, should such misstatements
b.
Risk of Material
Misstatement
Balance–Related
Audit Objectives
Acceptable
Audit Risk
Inherent
Risk
Planned
Detection
Risk
Existence
Medium
Medium
Medium
Completeness
Medium
Low
Medium
Accuracy
Low
High
Low
Classification
Medium
Low
High
Cutoff
Medium
Medium
Medium
Detail tie–in
Low
Medium
Low /
Medium
Realizable value
Low
High
Low
Rights and
obligations
Medium
Medium
Medium
d. Hopper may increase his assessment of control risk in the
existence, completeness, and cutoff audit objectives, which
9–36
RISK FACTOR
RELATED AUDIT RISK MODEL COMPONENT
1.
Acceptable audit risk
2.
Control risk
3.
Acceptable audit risk
4.
Inherent risk
5.
Planned detection risk
6.
Acceptable audit risk
7.
Inherent risk
8.
Inherent risk
9.
Planned detection risk
10.
Control risk
9–37
CONTROL
RISK
INHERENT
RISK
ACCEPTABLE
AUDIT RISK
PLANNED
EVIDENCE
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
N
N
I
I or N
N
N
D
I
I
I
N
N
N
I
I
N
D
I
N or I
I
I
D
N
N
N
I
N or I
N
D
D
D
I
I
I
I
D
D
I
I
I
9-17
Cases
9–38
FACTOR
EFFECT ON THE
RISK OF MATERIAL
MISSTATEMENT
AUDIT RISK
MODEL
COMPONENT
1. Henderson is a new client.
Increases
Inherent risk
2. Henderson operates in a
regulated industry, which
increases regulatory oversight
and need for compliance with
regulations.
Increases
Acceptable audit risk
3. The company’s stock is publicly
traded.
Increases
Acceptable audit risk
4. The company is more profitable
than competitors, but recent
growth has strained operations.
Increases
Acceptable audit risk
5. The company has expanded its
use of derivatives and hedging
transactions.
Increases
Inherent risk
6. Henderson has added
competent accounting staff and
has an internal audit function
with direct reporting to the audit
committee.
Decreases
Control risk
7. The financial statements contain
several accounting estimates
that are based on management
assumptions.
Increases
Inherent risk
8. The company has experienced
difficulty in tracking property,
plant, and equipment.
Increases
Control risk
9. Henderson acquired a regional
electric company.
Increases
Inherent risk
10. The audit engagement staff have
experience in auditing energy
and public companies.
Decreases
Planned detection
risk1
11. Partner review of key accounts
will be extensive.
Decreases
Planned detection
risk.1
1 The competency of the audit engagement staff and the thoroughness of the
9-18
9–39 Note: Excel solutions (P939a.xls and P939b.xls) are contained on the
text website.
a. See Worksheet 9–39A on pages 9–22 and 9–23. It is important to
recognize that there is no one solution to this requirement. The
determination of materiality and allocation to the accounts is
always arbitrary. In this illustration, the auditor makes estimated
creates a sensitivity that will need to be watched carefully as the
audit progresses. The allocation to the accounts is particularly
arbitrary. It is noteworthy that the sum of allocated amounts
b. The level of acceptable audit risk is based on an evaluation of
three factors:
1. The degree to which external users rely on the statements.
after the audit report is issued.
3. The auditor’s evaluation of management’s integrity.
Stanton Enterprise is a public company and therefore has a
high degree of reliance by external users on its financial
statements. The Company’s operating results and financial
Overall, then, an acceptable audit risk level of medium
would seem appropriate.
c. See Worksheet 9–39B on pages 9–24 and 9–25 that shows both
9-19
9–39 (continued)
Furthermore, the Company’s current, quick, cash, and times
interest earned ratios are up, and its debt to equity ratio is
down, indicating that the Company is extremely sound from a
liquidity standpoint.
the allowance may be significantly understated for 2016 and
must be looked at very carefully during the current audit. This
review would include considering whether a liberalization of
credit policies was used to help increase sales.
recorded, but may not, depending on dates of acquisition and
depreciation method used. Depreciation must be tested
considering these facts as determined.
Goodwill Goodwill also increased significantly, by $855,000.
Accounts Payable Accounts payable went down from 2015
to 2016. This doesn’t seem reasonable at all given an increase