Chapter 9 ASSESSING THE RISK OF MATERIAL MISSTATEMENT
9-37 (OBJECTIVES 9-5, 9-9) Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. In each of the events a. through j., circle one letter for each of the three independent variables and planned evidence: I = increase, D = decrease, N = no effect, and C = cannot determine from the information provided.
a. The client changed from a privately held company to a publicly held company:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
b. The auditor decided to set assessed control risk at the maximum (it was previously assessed below the maximum):
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
c. The client acquired a new subsidiary located in Italy:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
d. The account balance increased materially from the preceding year without apparent reason:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
e. You determined through the planning phase that working capital, debt-to-equity ratio, and other indicators of financial condition improved during the past year:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
f. The client’s management materially decreased long-term contractual debt:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
g. The client began selling products online to customers through its website during the year under audit. The online customer ordering process is not integrated with the company’s accounting system. Client sales staff print out customer order information and enter those data into the sales accounting system:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
h. This is the second year of the engagement, and there were few misstatements found in the previous year’s audit. The auditor also decided to increase reliance on internal control:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
i. In discussions with management, you conclude that management is planning to sell the business in the next few months. Because of the planned changes, several key accounting personnel quit several months ago for alternative employment. You also observe that the gross margin percent has significantly increased compared with that of the preceding year:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
j. There has been a change in several key management personnel. You believe that management is somewhat lacking in personal integrity compared with the previous management. You believe it is still appropriate to do the audit:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
9-38 (OBJECTIVE 9-7) This problem is based on the JA Tires data that was first introduced in problem 6-35. If you have not already accessed the data, it can be downloaded from the textbook website. As part of risk assessment procedures, you have been asked to perform some preliminary data analytics on the sales file to assess whether individual transactions or classes of sales transactions represent increased inherent risk because they are large, unusual, or involve related parties. You can perform this analysis using Excel, or audit software such as ACL or IDEA.
Required. Identify the five largest sales transactions. Indicate whether you believe these transactions should require an increase in inherent risk. Do you believe any of these transactions individually, or in the aggregate, should be considered a significant risk?
b. Identify any other transactions that appear to involve unusual product numbers, customers, or prices.
c. Customer 1027, New York Tire Depot, is considered a related party to JA Tires. What is the total amount of sales to this customer?
