Question

1. The relationship between PDR and materiality
2. What  tolerable misstatement is
3. Factors that affect the IR
4. Allocating materiality to segments or accounts
5. Qualitative factors that affect materiality levels
6. who is responsible for establishing a private company’s internal control
7. what is fraud, what are its different types
8. What are the likely sources of information to assess fraud risks

Answer 1

1)

Planned detection risk is the risk that the auditor fails to find out material misstatements when carrying out the audit procedures.Detection risk includes sampling risk, which is defined as: The risk which arises from the possibility that the auditor’s conclusion, based on a sample may be different from the conclusion reached if the entire population were subjected to the same audit procedure.

There is an inverse relationship between levels of planned detection risks and materiality. That is, the higher the planned detection risk, the lower the materiality level required and vice versa.If the auditor determines that the acceptable materiality level is lower at the planning stage, then the planned detection risk is increased. As a result, the auditor would reduce the level of detection risk by taking the following actions: (a) to reduce the assessed risk of material misstatement by carrying out extended or additional tests of controls; or (b) to reduce detection risk by modifying the nature, timing and extent of planned substantive audit procedures.

2)

Tolerable misstatement is the maximum amount of known and likely error an auditor can accept in a financial statement classification without adjustment.

3)

Factors affecting inherent risk are:-

A. Integrity of management.

B. Management experience and knowledge.

C. Nature of entity's business.

D. Factors affecting industry.

E. Quality of accounting system.

F. Complexity of transactions.

G. Unusual transaction at or near period end.