Exam 7: Materiality and Risk

The first step in applying materiality is

PA is auditing a client where the accounts receivable are in worse shape than last year: many accounts are significantly overdue. How would this fact be dealt with in the audit risk model?

Assessing design effectiveness and conducting tests of controls are required when the auditor

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be

Because control risk and inherent risk vary from cycle to cycle, account to account, or objective to objective,

Which of the following would be a signal of possible problems with management integrity?

Audit risk is ordinarily set by the auditor during planning and

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will

PA has set audit risk at 5% and determined that inherent risk and control risk is at 100%. What is the detection risk?

If the auditor assessed the detection risk as high, the extent of evidence the auditor plans to accumulate is

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

Audit risk is a measure of

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for

Using the audit risk model, audit risk describes targeted assurance, while control risk and inherent risk are assessed based upon a variety of factors. Of the components of the audit risk model, which is most likely to be set to 100%?

Mugsy Brights Limited (MBL) is a private company in Winnipeg that sells mugs, jars, and bottles in a variety of colours, sizes, and materials. MBL has been owned by four equal owners since its inception. The owners have different skills-creative design, marketing, finance, and information systems. The company attributes much of its success to the use of materials that can be easily shipped without breaking, and unique designs that appeal to a variety of buyers, particularly commercial buyers who purchase for restaurants, or for businesses who choose to advertise their business by giving away or selling regular or travel mugs. The owners meet formally every month and have informal meetings two or three times per week to discuss particular clients or new approaches. About a quarter of the company's sales are completed via the company's secure website, while the remainder are by telephone or purchase order. MBL works with distributors of kitchenware, selling wholesale to hundreds of outlets in Canada. Most of these sales are done over the phone, although a salesperson does spend some time in major cities across the country visiting some of the large customers and helping with shelf layout and marketing to the ultimate consumers for larger distributors. These efforts have resulted in gradually increasing market share for the company. All sales are recorded in the accounting software package used by the company. The accounting manager reports directly to one of the owners, and there are two other employees in the accounting department. Password controls are used to limit functions that are accessible by employees. For example, only the controller can implement wage rate increases or product price increases (which are reviewed and approved by the owner responsible for marketing). Two owners are required to sign cheques, and do so with source documents attached. Similarly, two owners are required to approve new employees. All manufacturing is outsourced to local producers who work with different materials. For example, a different supplier handles steel mugs versus plastics or glass. Ceramics are rarely used as they are quite breakable, whereas some forms of glass are very durable. MBL does not hold any inventory, as manufacturing is all done to order. However, as there have been some collection problems from customers, the company has had to go to the maximum of its line of credit and has no additional borrowing capacity available. It is waiting for the results of the audited financial statements to approach its bank for an increase in its line of credit. Internet sales are prepared (via credit card), while sales to distributors are net thirty. The company has an April year end. Following are extracts from the annual financial statements. Required: A) What audit risk would you assign to the company? Why? [Tip: Do some calculations and consider client business risk.] B) Calculate preliminary materiality. Justify your decision of materiality base and choice of materiality.

If detection risk is reduced, the amount of evidence the auditor accumulates will

A PA firm can experience high levels of business risk if the audit firm

Big Box Distribution Company has an in-house information systems department of 50 people. The company generally does its own programming, although some software was acquired as a software package. A software package was purchased for customer relationship management, which will be modified by the programming staff. Procedures for implementing programs vary by department. All major changes are approved by the Management Information Systems steering committee. The committee is also given a list of the maintenance changes that are planned in the coming year. Some departments request that the data processing department handle testing, while other users are rather picky and want to do their own testing. Requirements are generally prepared in writing, although small maintenance changes may be handled verbally. Required: Assess inherent risk associated with program changes at Big Box.

A) Explain how auditors use the audit risk model when planning an audit. B) Describe the audit risk model and each of its components.

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?