Below are ten independent risk factors: 1. The client lacks sufficient working c

Question

Below are ten independent risk factors:

1. The client lacks sufficient working capital to continue operations.

2. The client fails to detect employee theft of inventory from the warehouse because there are no restrictions on warehouse access and the client does not reconcile inventory on hand to recorded amounts on a timely basis.

3. The company is publicly traded.

4. The auditor has identified numerous material misstatements during prior year audit engagements.

5. The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated.

6. The client is one of the industry’s largest based on its size and market share.

7. The client engages in several material transactions with entities owned by family members of several of the client’s senior executives.

8. The allowance for doubtful accounts is based on significant assumptions made by management.

9. The audit plan omits several necessary audit procedures.

10. The client fails to reconcile bank accounts to recorded cash balances.

Required

Identify which of the following audit risk model components relates most directly to each of the ten risk factors:

• Acceptable audit risk

• Inherent risk

• Control risk

• Planned detection risk

Explanation / Answer

The related Audit Risk Model to following ten independent risk factors are:

1. The client lacks sufficient working capital to continue operations. = Control risk

2. The client fails to detect employee theft of inventory from the warehouse because there are no restrictions on warehouse access and the client does not reconcile inventory on hand to recorded amounts on a timely basis.= Planned detection risk

3. The company is publicly traded. = Acceptable audit risk

4. The auditor has identified numerous material misstatements during prior year audit engagements. = Inherent risk

5. The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated. = Planned detection risk

6. The client is one of the industry’s largest based on its size and market share. = Control risk

7. The client engages in several material transactions with entities owned by family members of several of the client’s senior executives. = Acceptable audit risk

8. The allowance for doubtful accounts is based on significant assumptions made by management. = Inherent risk

9. The audit plan omits several necessary audit procedures. = Control risk

10. The client fails to reconcile bank accounts to recorded cash balances. = Control risk

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