of her staff have left the firm. . You have just been hired by the Dima Accounti
ID: 2567903 • Letter: O
Question
of her staff have left the firm. . You have just been hired by the Dima Accounting Fim. their con You are sitting in the lunch room and two senior ccounting Finm eir conversation. State whether you agree or partners sit down at the same table as you. You disagree with each of the statements to th or auditors and explain why: a. Control risk refers to both thmdbt nios and the implementation of controls. To assess esign of controlsoth of the control and then test whether the control risk, the auditor must first assess the st staff. control is being consistently followed by client control is yong, t s impossible for a highly material error or Cotrol Risk. fraudulent transaction to get through the syst tem. c. Audit risk should vary inversely with Inhere assessed, the lower the risk of material missta Detection Risk. atement so the auditor should assume lower Planned really judgmental in nature. AAR is m (PCAOB statements is much larger. ors may assign numbers to the various risks (IR, CR, PDR, AAR), the numbers are uch higher with publicly traded companies because they have more regulations to follow e. rules in addition to FASB) and because the number of beneficiaries of the financialExplanation / Answer
a. We agree with the statement given by the auditors as the control risk refers to a risk that a misstatement in the financial statements due to fraud or error and that is material either individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the internal control implemented in the company. Control risk is a function of the effectiveness of the design and operation of internal control system of a company. If the internal control system of a company are weak then there will be high chances of control risk in a company. Therefore, an auditor is required to assess the strength of the internal control system of the company and should test whether the same are consistently followed in the organization. The auditor assesses control risk using evidence obtained from tests of internal controls.
b. Internal controls are defined as the procedures, policies and steps implemented by an organization to monitor the operational efficiency and reduce the risks of material misstatements and prevention and detection of Fraud or error on timely basis. The advantage of internal control is that it leads to efficient run of organization. Strong internal controls will ensure a company's resources are utilized only for their intended purposes, greatly minimizing the risk of resource misuse. Internal control also prevents any financial irregularities by detecting them quickly and thus resolving any issues that arise in a timely manner. In addition, having strong internal controls in place can prevent a company's employees from being accused of any irregularities or misappropriations of funds. If Internal controls in a company are strong then it can reduce the chances of highly material error or fraudulent transaction to a great extent but the same cannot be mitigated to zero. Therefore, the argument of auditors is correct to a great extent but its not wholly true.
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