Business

For each of the following independent scenarios, state the effect, if any, on each component of the audit risk model and explain why you made each selection.  For your answer to the effect portion of the question, select from I = increase, D = decrease, or N = no effect.  I have included a table for each scenario to help you organize your answers and be complete.  This question was adapted from the text, but I have altered it to require explanations.  Also, I disagree with the text solutions manual on some of them but since the solutions manual doesn’t provide an explanation of their answers, I cannot determine how the authors arrived at their conclusions.  I will be grading based on my answers.  As I reminder, attempting to access the solutions manual to answer these questions is a violation of academic integrity.

a)              In discussions with management, you conclude that management is planning to sell the business in the next few months.  Consequently several key accounting personnel have recently quit.  In addition, the firm’s gross profit margin has significantly increased since last year.

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Risk Model Component Effect

(I, D, N)

Explanation
AAR
IR
CR
PDR

b)             The client began selling products online to customers through its web page during the year under audit.  The online ordering process has not been integrated with the firm’s accounting system.  The firm’s sales staff print out online orders and manually enter the information into the firms accounting system.

Risk Model Component Effect

(I, D, N)

Explanation
AAR
IR
CR
PDR

c)              An account balance increased by a material amount from last year without any explanation.

Risk Model Component Effect

(I, D, N)

Explanation
AAR
IR
CR
PDR

d)             The firm’s management materially decreased long-term contractual debt from what is was last year.

Risk Model Component Effect

(I, D, N)

Explanation
AAR
IR
CR
PDR

e)              This is the second year of the engagement and there were few misstatements found in the prior year’s audit.  Consequently, the auditor has decided to increase reliance on internal controls.

Risk Model Component Effect

(I, D, N)

Explanation
AAR
IR
CR
PDR

 

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