BU547 Lecture Notes - Lecture 3: Financial Statement, Audit Evidence, Loan Covenant

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If materiality remains unchanged and audit evidence is increased, then audit risk is also decreased. Audit risk is decreased because additional evidence has been obtained, which reduces detection risk and, therefore, audit risk. If audit risk remains unchanged and materiality is decreased, the amount of audit evidence needed is increased. Given the lower level of materiality, additional audit evidence is needed to ensure that no material errors occur in the financial statements. For the company described in the following paragraph, assess audit risk, inherent risk, control risk, detection risk, and the amount of audit evidence that will have to be obtained. Describe your assessment using terms such as low, moderate, or high. Abc company is a new public company that develops computer parts for export to developing countries. All accounting functions are performed by one accountant. The company"s bank loans have a working capital covenant that is close to being violated.

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