A . Stacey, the partner in charge of the audit of NoCo. CPAs, sets the planned level of audit risk for the audit of accounts payable at.06.

A . Stacey, the partner in charge of the audit of NoCo. CPAs, sets the planned level of audit risk for the audit of accounts payable at.06. The risk of material misstatement is assessed at .65. What is this audit's detection risk?

DR = AR/(RMM)

DR = .06/.65

DR = 9.2%

B. In one sentence each, compare misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets

Expert Solution

A) Stacey, the partner in charge of the audit of NoCo. CPAs, sets the planned level of audit risk for the audit of accounts payable at.06. The risk of material misstatement is assessed at .65.

Audit Risk = Inherent Risk * Control risk * Detection Risk

Risk of Material Misstatement = Inherent Risk * Control Risk

Hence Detection Risk = Audit Risk / Risk of Material Misstatement

= 0.06/0.65= 9.2%

Detection risk is the chance that an auditor will fail to find material misstatements that exist in an entity's financial statements. These misstatements may be due to either fraud or error. Auditors make use of audit procedures to detect these misstatements, but because of the nature of these procedures, some detection risk will always exist. For example, sometimes auditors take a sample of a certain type of company transaction because examining every transaction is impractical. Increasing the sample size can reduce detection risk, but some risk will always remain.

B) Comparing misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets:-

Misstatements arising from misappropriation of assets involve the theft of an entity’s assets where the theft causes the financial statement to be misstated. Misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in financial statements intended to deceive financial statement users.

ekkarill92 answered 2 years ago

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