Indicate whether you agree or disagree with each statement, and explain your reasoning. Each of the following changes (considered independently and holding other things constant) can be expected to decrease the level of detection risk associated with the auditor s substantive tests: 1. decreasing materiality 2. increasing inherent risk 3. decreasing audit risk An auditor was appointed to the audit of BID Inc. (BID) subsequent to BID s year-end date. BID is in the business of providing IT consulting services and is also a computer equipment reseller. BID only orders inventory from the manufacturer once a customer has placed an order. This allows for BID to have low levels of inventory. As a result of being appointed to the audit subsequent to year end, the auditor was unable to attend the year-end inventory count and could not obtain sufficient and appropriate audit evidence for the inventory balance. In this circumstance the auditor should issue a qualified opinion due to a scope limitation and the audit report should set out the nature of the qualification in the auditor s responsibility paragraphs. When the auditor s preliminary assessment of control risk is that the control risk is low to medium and the auditor plans to place some reliance on the operating effectiveness of the controls to reduce the amount of substantive testing, the sample size required in testing the effectiveness of the controls should be larger since control risk is lower. Auditors perform analytical procedures on the draft financial statements at the planning stage of the audit looking for relationships that do not make sense, as these may indicate problem areas where there may be material misstatements. In audit and review engagements, an assessment of the CGA s independence from the entity is required, whereas in compilation engagements the assessment is not required. The auditor will decide on the nature, extent, and timing of the audit evidence to be obtained and evaluated. An auditor must obtain the best available evidence with the consideration of cost. The auditor, in an audit using a combined approach, will rely on the client s internal controls. It is the auditor s responsibility to develop and implement effective controls.
Indicate whether you agree or disagree with each statement, and explain your reasoning.
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Each of the following changes (considered independently and holding other things constant) can be expected to decrease the level of detection risk associated with the auditor s substantive tests:
1. decreasing materiality
2. increasing inherent risk
3. decreasing audit risk
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An auditor was appointed to the audit of BID Inc. (BID) subsequent to BID s year-end date. BID is in the business of providing IT consulting services and is also a computer equipment reseller. BID only orders inventory from the manufacturer once a customer has placed an order. This allows for BID to have low levels of inventory. As a result of being appointed to the audit subsequent to year end, the auditor was unable to attend the year-end inventory count and could not obtain sufficient and appropriate audit evidence for the inventory balance. In this circumstance the auditor should issue a qualified opinion due to a scope limitation and the audit report should set out the nature of the qualification in the auditor s responsibility paragraphs.
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When the auditor s preliminary assessment of control risk is that the control risk is low to medium and the auditor plans to place some reliance on the operating effectiveness of the controls to reduce the amount of substantive testing, the
sample size required in testing the effectiveness of the controls should be larger since control risk is lower. -
Auditors perform analytical procedures on the draft financial statements at the planning stage of the audit looking for relationships that do not make sense, as these may indicate problem areas where there may be material misstatements.
-
In audit and review engagements, an assessment of the CGA s independence from the entity is required, whereas in compilation engagements the assessment is not required.
-
The auditor will decide on the nature, extent, and timing of the audit evidence to be obtained and evaluated. An auditor must obtain the best available evidence with the consideration of cost.
-
The auditor, in an audit using a combined approach, will rely on the client s internal controls. It is the auditor s responsibility to develop and implement effective controls.
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