Q 2- Part A (4 marks)

You are evaluating audit results for assets in the audit of Roberts Manufacturing. You set the preliminary judgment about materiality at $50,000. The account balances, performance materiality, and estimated overstatements in the accounts are show next.

Account	Account Balance	Performance materiality	Estimate of Total Overstatements
cash	$50,000	$5,000	$1,000
A/R	1,200,000	30,000	20,000
Inventory	2,500,000	50,000	?
Other assets	250,000	15,000	12,000
Total	$4,000,000	$100,000	?

Required:

1. Assume you tested inventory amounts totaling $1,000,000 and found $10,000 in overstatements. Ignoring sampling risk, what is your estimate of the total misstatement in inventory? (1 marks)
2. Based on the audit of the assets accounts and ignoring other accounts, are the overall financial statements acceptable? Explain. (2 marks)
3. What do you believe the auditor should do in the circumstances? (1 mark)

Q 2-Part B (6 marks)

Bill Gates is planning the audit of the investments account for audit client Garden Supply Co.(GSC). GSC invests excess cash at the end of the summer sales season through an investment manager who invests in equity and debt securities for GSCs account. Bill has assessed the following risks as low, medium, or high for the relevant balance-related audit objectives in the investment account.

		Risk of Material Misstatements
Balance-related audit objectives	Audit Risk	Inherent Risk	Control Risk	Planned Detection Risk
Existence	Medium	Medium	Medium
Completeness	Medium	Low	Medium
Accuracy	Low	High	Medium
Classification	Medium	Low	Low
Cutoff	Medium	Medium	Low
Detail tie-in	Low	Medium	Low
Realizable value	Low	High	Medium
Rights and obligations	Medium	Medium	Low

Required:

1. Describe each of the four identified risks in the columns of the table above. (2 marks)
2. Fill in the blank for planned detection risk for each balance-related audit objective using the terms low, medium, or high. (2 marks)
3. Which audit objectives require the greatest amount of evidence and which require the least? (1 mark)
4. Through audit testing, Bill finds the investment managers controls over recording purchases and sales of securities are not as effective as originally assessed. What should Bill do? (1 mark)