Question 1 10 Marks

1. Explain what is meant by the following?

(3 marks)

Item	Explanation
Low acceptable audit risk
High assessed control risk for a transaction-related audit objective, e.g. occurrence of sales
High inherent risk for a transaction-related audit objective, e.g. accuracy of sales

Question 1 continued next page

Question 1 (continued)

2. What is the impact of the following independent factors on the elements of the audit risk model? E.g. increase (I) / decrease (D) / no change (N)

(7 marks)

Item	Factor	Acceptable audit risk	Inherent risk	Control risk	Planned detection risk
1	There is a generous compensation scheme for management based on reported profit
2	Based on prior year tests, the auditor decides to place less reliance on internal control
3	Assessment of financial ratios indicates that the client has no going concern problems
4	The audit client conducts several material transactions with related parties
5	The client has changed from a privately-held company to a publicly-held company
6	This is the second year of auditing this client, and the risk assessments may now be less conservative
7	There has been a change in key management personnel, and they appear lacking in personal integrity compared with previous management