A firm uses the audit risk model, AR=RMMXDR to plan audit programs, as described below. This...

 

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A firm uses the audit risk model, AR=RMMXDR to plan audit programs, as described below. This often involves determining required DR after specifying M and AR, and then assessing the operating effectiveness of controls in terms of RMM, or DR=RMM/AR. THE FIRM'S POLICIES Audit Risk: The firm specifies AR for every application area and for any materiality amount, as: VERY LOW 1% to <5% LOW 5% to <15% MODERATE 15% to 30% Not permissible These ranges are modified according to the type of risk, as described below. HIGH f an auditor doesn't specify a numerical risk level for AR, the auditor must specify a category (VL, L or M, but not H). The firm's planning software will then assume that VL=1%, L = 5% and M=15%. Risk of Material Misstatement, RMM: This risk is based on the auditor's judgment regarding the operating effectiveness of the system and is based on the auditor's test of controls. If the auditor doesn't specify a numerical risk level for RMM, the auditor must specify a category (VL, L or M or H). If the auditor decides not to test controls, then RMM is set to H. The firm's planning software will then assume that VL-5%, L=15%, M-30% and H=100%. Detection Risk, DR: The auditor should specify a value for DR that is consistent with AR and RMM. That is, DR = AR/RMM and is dependent on the auditor's choices of AR and RMM. If application of the risk levels for AR and RMM, pursuant to the above guidelines, results in DR250%, then the auditor sets DR-50%. DR > 50% is not permissible under the firm's guidelines. A. The auditor sets AR to VERY LOW, and RMM, the operating effectiveness, is found to be LOW. Calculate planned DR in accordance with the planning guideline. B. The auditor sets AR to LOW, and RMM, the operating effectiveness, is found to be HIGH. Calculate planned DR in accordance with the planning guideline C. The auditor sets AR to MODERATE, and RMM, the operating effectiveness, is found to be LOW. Calculate planned DR in accordance with the planning guideline. A firm uses the audit risk model, AR=RMMXDR to plan audit programs, as described below. This often involves determining required DR after specifying M and AR, and then assessing the operating effectiveness of controls in terms of RMM, or DR=RMM/AR. THE FIRM'S POLICIES Audit Risk: The firm specifies AR for every application area and for any materiality amount, as: VERY LOW 1% to <5% LOW 5% to <15% MODERATE 15% to 30% Not permissible These ranges are modified according to the type of risk, as described below. HIGH f an auditor doesn't specify a numerical risk level for AR, the auditor must specify a category (VL, L or M, but not H). The firm's planning software will then assume that VL=1%, L = 5% and M=15%. Risk of Material Misstatement, RMM: This risk is based on the auditor's judgment regarding the operating effectiveness of the system and is based on the auditor's test of controls. If the auditor doesn't specify a numerical risk level for RMM, the auditor must specify a category (VL, L or M or H). If the auditor decides not to test controls, then RMM is set to H. The firm's planning software will then assume that VL-5%, L=15%, M-30% and H=100%. Detection Risk, DR: The auditor should specify a value for DR that is consistent with AR and RMM. That is, DR = AR/RMM and is dependent on the auditor's choices of AR and RMM. If application of the risk levels for AR and RMM, pursuant to the above guidelines, results in DR250%, then the auditor sets DR-50%. DR > 50% is not permissible under the firm's guidelines. A. The auditor sets AR to VERY LOW, and RMM, the operating effectiveness, is found to be LOW. Calculate planned DR in accordance with the planning guideline. B. The auditor sets AR to LOW, and RMM, the operating effectiveness, is found to be HIGH. Calculate planned DR in accordance with the planning guideline C. The auditor sets AR to MODERATE, and RMM, the operating effectiveness, is found to be LOW. Calculate planned DR in accordance with the planning guideline.

Answer rating: 100% (QA)

Question A Audit risk is the risk that financial statements are materially incorrect even though the audit opinion states that the financial reports are free of any material misstatements The purpose ... View the full answer