You are considering acceptable audit risk at the nancial statement level. For ea

Question

You are considering acceptable audit risk at the nancial statement level. For each of the following independent scenarios, based only on the information provided, indicate the effect on acceptable audit risk compared to a typical private company audit.

a. LVD is a pharmaceutical company that has three successful drugs. They have recently decided to make a public offering of their stock.

b. Budd Co., a private company, has approached your audit rm to bid on their annual audit. During discussions with the CFO, you learn that the company is ling for bankruptcy.

c. Stephens Inc., a private company, has recently installed a new accounting information system.

Explanation / Answer

Audit risk is the risk involved in forming and stating an opinion on an issue, by the auditor,with regard to the financial informations of a firm, on completion of the audit ,entrusted to him.It may be an appropriate or inappropriate opinion.

Acceptable audit risk is the level of the above risk ,the auditor is willing to take- the level to which he can allow misststements and unqualifed statemets.This decides the quantum as well as the quality of his audit of the financial records of the firm.

a)LVD is a pharmaceutical company that has three successful drugs. They have recently decided to make a public offering of their stock.

In this case the auditor has to ascertain whether the basic financial requirements of the exchange ,where it is going to be listed have been met - with this company ,as they are popular in the market, this might be a cake-walk.

-as it is successful,the company's income must be regular and predictable -so as to go public

-as the drugs are successful, there is marketability for the products- and this considerably influencesthe acceptability of risk criteria

b)Budd Co., a private company, has approached your audit firm to bid on their annual audit. During discussions with the CFO, you learn that the company is ling for bankruptcy.

-The capacity of the firm to pay audit fees -on the face of financial distress - will be crucial in decision making for acceptance level of the risk

- the quality of the management team will also have a say in deciding the level of risk to take. The auditor may want to be 100% certain -ie. 0% risk.

c. Stephens Inc., a private company, has recently installed a new accounting information system.

- as the system is new ,there may be no previous records /audits to rely upon and start from. Hence auditing must be in-depth and detailed. So, acceptable level of risk tends to be lower,ie. the auditor will want to be more certain ,that the financial statements are not mis-stated.

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