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Chapter 5 Audit Planning: Assessment of Inherent Risk and Materiality
Chapter 5 Audit Planning: Assessment of Inherent Risk and Materiality
Chapter 5 Audit Planning: Assessment of Inherent Risk and Materiality
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2.
3.
59
4.
5.
6.
8.
7.
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10.
ANSWER:
11.
61
12.
13.
ANSWER:
14.
15.
ANSWER:
16.
the
18.
17.
62
63
19.
20.
21.
ANSWER:
24.
In
26.
25.
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planning
a.
b.
c.
d.
ANSWER:
27.
28.
are
29.
ANSWER:
30.
66
31.
67
33.
34.
35.
Yes
No
Yes
Yes
No
Yes
Yes
Yes
36.
Yes
Yes
No
Yes
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Return on sales.
ANSWER:
37.
38.
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40.
COMPLETION:
41.
42.
43.
the
44.
DOCUMENT
PERMANENT FILE
53.
INTEGRITY
52.
DETECTION
51.
risk is the
50.
LOW
49.
48.
INTENT
47.
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RISK-DRIVEN
The
, in addition to the permanent file,
is an effective means for familiarizing members of the audit
team with the nature of the client's business and for
highlighting those areas presenting the highest audit risk.
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ANSWER:
54.
The
is an effective device for planning and
controlling audit field work.
ANSWER:
55.
PRE-AUDIT CONFERENCE
TIME BUDGET
QUALITATIVE
MATCHING
56. Indicate by letter the appropriate auditors response to
each of the listed audit environments. More than one response
may be applicable to each environment.
____ 1. The auditor assesses control risk at a high level and
suspects earnings inflation in the form of premature
revenue recognition.
____ 2. Although the auditor has found internal control to be
highly effective, analytical procedures suggest that
repairs and maintenance expenses may have been
debited to plant asset accounts, thereby materially
overstating net income.
____ 3. The auditor perceives internal control over sales and
cash receipts as excellent; but internal control
over
purchases, inventory, and cash payments is
considered
weak.
____ 4. Debits to the account, Construction in Progress
have increased dramatically during the year under
audit; during the same period, however, Repairs and
Maintenance Expense, as well as Research and
Development have experienced significant declines.
Internal control is considered good in all areas.
____ 5. Although salespersons are granted 5% commissions on
all sales, the current years rate, based on
unaudited
sales and commissions data, is 3%.
Internal control
over sales and cash receipts is strong.
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SOLUTION:
1.
2.
3.
4.
5.
6.
7.
a,c,e
a,f
c,g
a
a
b,c,e
d,f
PROBLEM/ESSAY
57. Louis Hernandez set the following materiality thresholds for
the Sanders Wholesale audit:
Individual item materiality - income statement:
$30,000 (5% of unaudited net income, $600,000)
Individual item materiality - balance sheet:
(2% of unaudited net assets, $3,500,000)$70,000
Aggregate materiality (20% of individual item)
Income statement $6,000
Balance sheet
$14,000
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Required:
a.
b.
SOLUTION:
a.
In setting the individual item thresholds, Hernandez
should have considered the impact that a single misstatement
would have on the decisions of a reasonably informed investor.
The income statement threshold determines whether proposed audit
adjustments will be drafted, while the balance sheet threshold
relates to audit reclassifications. In setting the aggregate
thresholds, Hernandez should have considered the quality of
Sanders existing internal control. In this case, the high
percentage means that Hernandez believed Sanders internal
control to be effective for the year under audit. The stronger
the internal control is perceived to be, the fewer the expected
errors, and the higher the aggregate threshold.
b.
The internal control weaknesses suggest that Hernandez
should lower the aggregate materiality threshold percentage from
20% to a much lower figure. Weak internal control increases the
probability that numerous small errors have occurred and, in the
aggregate, have materially impacted the financial statements.
The high probability of material overstatement of net income
and net assets suggests a lowering of the individual item
thresholds. When materiality is related to a lower monetary
base, the minimum dollar amount that impacts decisions is also
reduced. The threshold may be lowered by reducing the
percentages, or by lowering the income and asset bases to which
the percentages are applied.
58. For each of the listed scenarios, determine whether inherent
risk or control risk or both should be assessed at a high level.
Then describe an appropriate audit approach. In developing your
approach, consider whether the auditor should decrease reliance
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