You are in charge of planning the audit for BCS, Inc., and will use the audit risk model to plan the internal control testing and the substantive testing for the client.
a. If inherent risk is assessed at 0.5 for the purchase cycle and internal control risk is assessed at 0.3, what is detection risk? Assume that audit risk  = 0.05.
b. What evidence would you gather to support the assessment of inherent risk and control risk?
c. Assume that you determine that control risk is 0.5 instead of 0.3 after your internal control testing.
(1) Calculate the new detection risk.
(2) In this situation, will you perform more or less substantive test work than when the control risk was assessed at 0.3? Explain your answer using the audit risk model.
(3) In general, will you perform more or less internal control test work when control risk is 0.3 than when control risk is 0.50
d. If you decrease control risk from 0.7 to 0.5, will you do more or less internal control testing? More or less substantive testing? Explain your answer using the audit risk model.
e. Does the auditor control inherent risk, control risk, detection risk, or audit risk? Explain your answer.
f. What is audit risk? Does it differ from one client to another client? Explain your answer.
g. How does the auditor control audit risk? Explain why it is important to keep audit risk to an acceptably low level? What is an acceptably low level?

  • CreatedJanuary 22, 2015
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