25. 1. In connection with the preliminary planning for the audit of XYZ Company, the auditors have determined that they are willing to accept an overall risk of material misstatement (audit risk) of 8% for the inventory account. Further, they have determined that overall inherent risk is 75%. In addition, they believe that the internal control system will detect material misstatements 80% of the time and fail to detect 20% of the time. Based on these facts, (and using the audit risk equation) what amount should the auditors set for detection risk?

2. Assume that you have performed tests of internal controls of XYZ Company (above) and have determined that the internal control system will detect material misstatements 70% of the time. Will this result require an increase, decrease or the same amount of substantive testing?

3. After setting the planned inherent risk at 75%, the field staff auditors discovered that the industry in which the client operates has been severely disrupted by technological changes that affect its inventory offerings. Please propose a revised inherent risk percent that reflects this new information.

Answer rating: 100% (QA)

Answer 1 The auditors should set the planned detection risk at 14 2 The amount of substantive testin... View the full answer