Question

Q 2- Part A

You are evaluating audit results for assets in the audit of Roberts Manufacturing. You set the preliminary judgment about materiality at $50,000. The account balances, performance materiality, and estimated overstatements in the accounts are show next.

Account	Account Balance	Performance materiality	Estimate of Total Overstatements
cash	$50,000	$5,000	$1,000
A/R	1,200,000	30,000	20,000
Inventory	2,500,000	50,000	?
Other assets	250,000	15,000	12,000
Total	$4,000,000	$100,000	?

Required:

1. Assume you tested inventory amounts totaling $1,000,000 and found $10,000 in overstatements. Ignoring sampling risk, what is your estimate of the total misstatement in inventory?
2. Based on the audit of the assets accounts and ignoring other accounts, are the overall financial statements acceptable? Explain.
3. What do you believe the auditor should do in the circumstances? (1 mark)

Q 2-Part B

Bill Gates is planning the audit of the investments account for audit client Garden Supply Co.(GSC). GSC invests excess cash at the end of the summer sales season through an investment manager who invests in equity and debt securities for GSC’s account. Bill has assessed the following risks as low, medium, or high for the relevant balance-related audit objectives in the investment account.      

		Risk of Material Misstatements
Balance-related audit objectives	Audit Risk	Inherent Risk	Control Risk	Planned Detection Risk
Existence	Medium	Medium	Medium
Completeness	Medium	Low	Medium
Accuracy	Low	High	Medium
Classification	Medium	Low	Low
Cutoff	Medium	Medium	Low
Detail tie-in	Low	Medium	Low
Realizable value	Low	High	Medium
Rights and obligations	Medium	Medium	Low

Required:

1. Describe each of the four identified risks in the columns of the table above.
2. Fill in the blank for planned detection risk for each balance-related audit objective using the terms low, medium, or high.
3. Which audit objectives require the greatest amount of evidence and which require the least? (1 mark)
4. Through audit testing, Bill finds the investment manager’s controls over recording purchases and sales of securities are not as effective as originally assessed. What should Bill do? (1 mark)

Answer 1

Answer-2-Part -A-The direct projection of the error is calculated as follows:-

a-Direct projection of error = Mistatement / amount sampled *population value

=($10,000/*1,000,000)*$2,500,000

=$25,000

b-NO,the financial statements are not at all acceptable. Including the error for inventory, the total overstatement errors are $58,000 which exceeds the materiality of $50,000.

c-The auditor should either propose the audit adjustment so that the unadjusted amount is less than materiality, or perform more testing to obtain the better estimate of the mistatements.

Answer-2-Part-B-

a-Audit risk is the risk that financial statements are materially incorrect even though the audit opinion states that the financial reports are free of any material misstatements. The purpose of an audit is to reduce the audit risk to an appropriately low level through adequate testing and sufficient evidence.

Inherent risk is the risk posed by an error or ommission in a financial statement due to a factor other than a failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex, or in situations that require a high degree of judgement in regard to financial estimates. This type of risk represents a worst case scenario because all internal controls in place have nonetheless failed.

Control risk is the probability that financial statements are materially misstated, due to failures in the system of controls used by a business. When there are significant control failures, a business is more likely to experience undocumented asset losses, which means that its finacial statements may reveal a profit when there is actually a loss.

Detection risk is the risk that the auditor will not detect a mistatement that exists in an assertion that could be material , either individually or when aggregated with other misstatement.

b)-

Level

i-Medium

ii -Medium

iii-Low

iv-High

v-Low

c) Assertion Evidence level

1-Existence Greatest

2-Rights and obligations Greatest

3-Completeness Least

4-Accuracy and valuation Greatest

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5-Classification Least