Assume you are the newly assigned senior on a continuing audit engagement for the Ranson Corporation, and are meeting with Tom Porter, partner in charge of the engagement.

Interim field work is already complete but was accomplished under another senior's supervision, before you were assigned to the engagement. You have reviewed the interim working papers and are discussing year end audit risk with Porter.

Porter observes that in prior years few material audit adjustments were proposed and that, in his judgment, management has integrity and Ranson is economically stable.Interim field work revealed no significant deficiencies in internal control, except that controls over recorded credit sales transactions were deficient in one respect: Credit approval documentation was missing for several material sales to new customers. In addition. Porter reminds you that in the prior year, the most significant audit adjustment was related to Accounts Receivable, an account which usually represents about 25 percent of reported total assets, although the adjustment was prompted by an unusual fluctuation in receivables turnover and the number-of-days-sales-in-accounts receivable, rather than by substantive tests of details.

Required:

1. From the information available, determine an acceptable risk that monetary errors greater than tolerable error might remain undetected after the audit team has completed all audit procedures deemed necessary. Justify the risk you accept.

2. Determine a risk that, should errors greater than tolerable error occur, the internal controls fail to detect them. Justify the risk level determined.

3. Determine a risk that analytical and other procedures fail to detect errors greater than tolerable error. Justify the risk level determined.

4. Determine an acceptable risk of incorrect acceptance for this engagement. How should the quantified risk of incorrect acceptance be interpreted?