Question

When analyzing the four scenarios below, use the Audit Risk Model as a framework in deciding whether the auditor’s conclusion is appropriate (max 1 page, single spaced, bullet points are acceptable):

Scenario 1: Andy, CPA, has participated in the audit of Swiss Cheese Company for five years, first as an assistant accountant and the last two years as the senior accountant. He has never seen an accounting adjustment recommended. He believes the inherent risk must be zero.

Scenario 2: Barbara, CPA, has just (November 30) completed an exhaustive study and evaluation of the internal control system of Healthy Foods, Inc. (fiscal year ending December 31). She believes the control risk must be zero because no material errors could possibly slip through the many error- checking procedures and review layers used by Healthy Food’s.

Scenario 3: Colin, CPA, is lazy and does not like audit jobs in Toronto, anyway. On the audit of Hogwarts Manufacturing Company, he decided to use detail procedures to audit the year-end balances very thoroughly to the extent that his risk of failing to detect material errors and irregularities should be 0.02 or less. He gave no thought to inherent risk and conducted only a very limited review of Hogwarts’s internal control system.

Scenario 4: Debbie, CPA, is nearing the end of a “dirty” audit of Power Protection Company. Power Protection’s accounting personnel all resigned during the year and were replaced by inexperienced people. The controller resigned last month in disgust. The journals and ledgers were a mess because the one computer specialist was hospitalized for three months during the year. Debbie thought thankfully, “I’ve been able to do this audit in less time than last year when everything was operating smoothly.”

Answer 1

part 1

Andy's conclusion regarding  inherent risk being zero is not appropriate. generally inherent risk can never be zero. but when it is assumed that inherent risk is zero then it would have been assumed that audit risk is zero based on the audit risk risk model. however for this assumption there is no sufficient evidence and thus this conclusion is inappropriate.

part 2

Barbara's conclusion regarding control risk being zero is not appropriate. generally control risk can never be zero because inspite of using of different procedures and review layers, there are chances of errors to occur. Moreover, Barbara's review has failed to include the last month of the fiscal year end. when it is assumed that control risk is zero then it would have been assumed that audit risk is zero based on the audit risk risk model.

Part 3

Colin conclusion is not completely appropriate. She fail to give consideration to inherent risk. The possibility of audit risk is low as the detection risk is low. the effectiveness of audit is based on the audit risk model. Colin's decision may make the audit inefficient as there is a need for a great amount of substantive testing.

part 4

Debbie has failed to determine the probabilities for the types of risk on the basis of which audit risk is determined such as inherent risk, control risk and detection risk. this shows that audit was less extensive and thus increasing the audit risk. Time is not important factor which in included in audit risk model for assessing risks. However, Debbie did more substantive testing spending less time on audit. Because of all these reasons, Debbie's conclusion is not appropriate.