Question

You do not have concerns about management's integrity, but you know that management's compensation is partially determined by meeting aggressive revenue targets. How would you consider this information in the audit risk model?

Question 3 options:

	increase acceptable audit risk for the audit and decrease inherent risk for sales
	reduce acceptable audit risk for the audit and decrease inherent risk for sales
	reduce acceptable audit risk for the audit and increase inherent risk for sales
	increase acceptable audit risk for the audit and increase inherent risk for sales

Answer 1

Answer:

Option D: increase acceptable audit risk for the audit and increase inherent risk for sales

Explanation:

Option A is incorrect because when management's compensation is partially determined by meeting aggressive revenue targets, it will not decrease inherent risk for sales, in contrary it will increase inherent risk for sales.

Option B is incorrect because when management's compensation is partially determined by meeting aggressive revenue targets, it will not reduce acceptable audit risk for the audit and decrease inherent risk for sales. In contrary it will increase acceptable audit risk for the audit and increase inherent risk for sales.

Option C is incorrect because when management's compensation is partially determined by meeting aggressive revenue targets, it will not  reduce acceptable audit risk for the audit, in contrary it will increase acceptable audit risk for the audit.

Option D is correct because when management's compensation is partially determined by meeting aggressive revenue targets, it will increase acceptable audit risk for the audit and increase inherent risk for sales. Determination on managements compensation by meeting aggressive revenue targets created a huge risk.