The following questions deal with the use of the audit risk model.

a. Assume that the auditor is doing a first-year municipal audit of Sackville, New Brunswick, and concludes that internal control is not likely to be effective.

(1) Explain why the auditor is likely to set both inherent and control risks at 100 percent for most segments.

(2) Assuming (1), explain the relationship of audit risk to planned detection risk.

(3) Assuming (1), explain the effect of planned detection risk on evidence accumulation compared with its effect if planned detection risk were larger.

b. Assume that the auditor is doing the third-year municipal audit of Sackville, New Brunswick, and concludes that internal controls are effective and inherent risk is low.

(1) Explain why the auditor is likely to set inherent and control risks for material segments at a higher level than, say, 40 percent, even when the two risks are low.

(2) For the audit of fixed asset accounts, assume inherent and control risks of 50 percent each and an audit risk of 5 percent. Calculate planned detection risk.

(3) For (2), explain the effect of planned detection risk on evidence accumulation compared with its effect if planned detection risk were smaller.

c. Assume that the auditor is doing the fifth-year municipal audit of Sackville, New Brunswick, and concludes that audit risk can be set high, and inherent and control risks should be set low.

(1) What circumstances would result in these conclusions?

(2) For the audit of repairs and maintenance, inherent and control risk are set at 20 percent each. Audit risk is 5 percent. Calculate planned detection risk.

(3) How much evidence should be accumulated in this situation?