ADMS 4552 Study Guide - Audit Risk, Data Center, Internal Control

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limealligator270

7 Oct 2012

School

York University

Department

Administrative Studies

Course

ADMS 4552

Professor

N A

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Document Summary

Audit risk: auditor"s willingness to permit material misstatements to exist after completing the audit: complement to assurance - want 98% assurance, so 2% audit risk. Inherent risk: auditor"s assessment of expectation of material misstatement before considering internal control. Control risk: auditor"s assessment of effectiveness of internal control to prevent or detect material misstatements: 1. Assessment whether client"s internal control is effective: 2. Auditor"s intention to rely on internal controls: get this by getting an understanding of ic, see the design effectiveness, and test for effectiveness. Planned detection risk: extent of evidence the auditor plans to accumulate: dependent on the other three factors in the model, determines amount of material auditor must collect. Reflects relationship between audit risk, inherent risk, control risk, and planned detection isk. Ar = ir x cr x pdr. Client business risk - the risk that client will fail to achieve objectives (going concern)

Related Questions

When planning a financial statement audit, a CPA must understandaudit risk and its components. The firm of Pack & Peckevaluates the risk of material misstatement (RMM) by disaggregatingRMM into its two components: inherent risk and control risk.

Required:

For each illustration, select the component of audit risk that ismost directly illustrated. The components of audit risk may be usedonce, more than once, or not at all.

Note if each illustration below is Control risk, Detectionrisk or Inherent risk

1. A client fails to discover employee fraud on a timely basisbecause bank accounts are not reconciled monthly.
2. Cash is more susceptible to theft than an inventory ofcoal.
3. Confirmation of receivables by an auditor fails to detect amaterial misstatement.
4. Disbursements have occurred without proper approval.
5. There is inadequate segregation of duties.
6. A necessary substantive audit procedure is omitted.
7. Notes receivable are susceptible to material misstatement,assuming there are no related internal controls.
8. Technological developments make a major product obsolete.
9. The client is very close to violating debt covenants.
10. XYZ Company, a client, lacks sufficient working capital tocontinue operations.

oliverhinoceros960

What are the key considerations when evaluating the design of internal controls in conjunction with a financial statement audit?

What are the key considerations when testing of the operating effectiveness of internal controls in conjunction with a financial statement audit?

What are the key considerations in determining what additional audit evidence to obtain about controls operating during the roll-forward period?

What are the key considerations when evaluating the severity of a deficiency in a control that directly addresses a risk of material misstatement?

olivetrout40

For each of the following independent situations relating to theaudit of ICFR, indicate the reason for and the type of audit reportyou would issue.
a. During the audit of Wood Pharmaceuticals, you are surprised tofind several control deficiencies in the entity's internal control.You determine that there is a reasonable possibility that any oneof them could result in a misstatement that is significant.Although the odds are extremely low that the deficiencies, singlyor taken together, will result in a material misstatement of theentity's financial statements, the large number of problems causesyou concern. Management's written assessment concludes that theentity's ICFR was effective as of the report date.
b. You agreed to perform an audit for Rodriguez & Co., afterthe entity's year- end. Due to time constraints, your audit firmcould not complete a full audit of ICFR. However, the evidence youdid collect suggests that the entity has exceptionally strong ICFR.You seriously doubt that a material weakness would have been foundif time had permitted a more thorough audit. Management's writtenassessment concludes that the entity's ICFR was effective as of thereport date.
c. George & Diana Company's internal audit function identifieda material weakness in the entity's ICFR. The entity corrected thisweakness about four months prior to the end of the annual reportingperiod. Management reassessed controls in the area and found themeffective. After reevaluating and retesting the relevant controls,you believe the controls to have been effective for a sufficientperiod of time to provide adequate evidence that they were designedand operating effectively as of the end of the entity's reportingperiod. Management's written assessment concludes that the entity'sinternal control was effective as of the report date.
d. Reynolds Distilleries identified what you agree is a materialweakness and made an adverse assessment in its report on ICFR. Theentity had not corrected the material weakness as of the end of thereporting period.
e. Cindy & David Company's management identified a materialweakness in the entity's ICFR during its assessment process. Theentity corrected this weakness about a month prior to the end ofthe annual reporting period. Management reassessed controls in thearea and believes they were effective as of the end of thereporting period. After reevaluating and retesting the relevantcontrols, you agree that the new controls are well designed, butsince the controls over this particular area are applied only onceat the end of each month (i. e., the controls have only operatedtwo times since being corrected), you do not believe you havesufficient audit evidence to assess their operating effectiveness.Management's written assessment concludes that the entity'sinternal control was effective as of the report date.
f. During the audit of ICFR for Big Al & Larry Industries, youdiscover several control deficiencies. You determine that there ismore than a reasonable possibility that any one of them couldresult in a financial statement misstatement. Although you do notbelieve that any of the deficiencies taken individually will resultin a material misstatement, you believe there is a moderately lowlikelihood that, taken together, the deficiencies could produce amaterial misstatement. Management's written assessment concludesthat the entity's internal control was effective as of the reportdate

ADMS 4552 Study Guide - Audit Risk, Data Center, Internal Control

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