Ajax Inc. is a public company ad a new client of Hawtorne Partners, a medium-siz

Question

Ajax Inc. is a public company ad a new client of Hawtorne Partners, a medium-sized audit firm. Jeffrey Rush is the engagement partner on the audit and has asked the members of the audit team to begin the process of gaining an understanding of the client, in accordance with AS 2110. One audit manager leads the group investigating the industry and economic factors, and another helps Jeffrey consider issues at the entity level. Jeffrey will hold discussions with members of the audit committee and will discuss a wide range of issues. He has a meetig arranged for next week with the four members of the audit committee, including the chair of te committee, Stella South, who like the other members of the audit committee, is an independent director.

Required

a. Make a list of the main factors that will be considered by each audit manager's group.

b. Based on the above information, can you conlude that Ajax Inc. complies with Section 301 of the Sarbabes-Oxley Act regardig its audit committee? Explain.

Explanation / Answer

2 reasons risk management is so critical to auditors

because its fundamental to client acceptance and resource allocation

client acceptance

auditors will only accepted clients that have managed their risks well unless the client is willing to pay more money in order to make up for their poor risk management

Resource allocation

auditors perform more tests that are related to aspects of the highest risk exposure to the fair presentation of the financial statements

RMM

control risk times inherent risk

inherent risk

risk of a material misstatement assuming so internal controls

control risk

it risk of the internal controls failing to detect a material misstatement

detection risk

the risk of the audit procedure failing to detect a material misstatement

audit risk

audit risk is the risk that the auditor expresses a inappropriate opinion

the auditor determines what level of AR is acceptable for a given client based on these 4 things

1. distribution of ownership
2. business risk to audit firm
3. client size
4.litigation environment

What is appropriate audit risk?

There is trade-off: maximum such that opinion can be issued without much risk that fin stmts are materially misstated

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