Using the audit risk model, state the effect on control risk, inherent risk, audit risk, and planned evidence for each of the following independent events. In each of the events

(a) to (k), circle one letter for each of the three independent variables and planned evidence: I = increase, D = decrease, N = no effect, and C = cannot determine from the information provided. Explain your reasoning.

a. The client's management materially increased long-term contractual debt:

b. The company changed from a privately held company to a publicly held company

c. The auditor decided to assess control risk at a level below maximum; it was previously assessed at maximum.

d. The account balance increased materially from the pre¬ ceding year without apparent reason:

e. You determined through the planning phase that working capital, debt to equity ratio, and other indicators of financial condition had improved during the past year

f. This is the second year of the engagement and there were few misstatements in the previous year. The auditor also decided to increase reliance on internal control:

g. About halfway through the audit, you discover that the client is constructing its own building during idle peri¬ ods, using factory personnel. This is the first time the client has done this and it is being done at your recom¬ mendation:

h. In discussions with management, you conclude that management is planning to sell the business in the next few months. Because of the planned changes, several key accounting personnel quit several months ago for alter¬ native employment. You also observe that the gross mar¬ gin percent has significantly increased compared with that of the preceding year:

i. There has been a change in several key management per¬ sonnel. You believe that management is somewhat lack¬ ing in personal integrity, compared with the previous management. You believe it is still appropriate to do the audit:

j.In auditing inventory, you obtain an understanding of internal control and perform tests of controls. You find it significantly improved compared with that of the pre¬ ceding year. You also observe that due to technology changes in the industry, the client's inventory may be somewhat obsolete:

Transcribed Image Text:

Control risk IDNC Inherent risk IDNC Audit risk IDNC Planned evidence. IDNC