Assessing the Risk of Material Misstatements

Assume you are a CPA working with ABC audit firm. Explain how risk of material misstatement should he assessed and what effect that assessment will have on detection risk for the following two audit clients:

1. Amna company, is a fast-growing trucking company operating in the southeastern part of the West Bank. The company is publicly held, but Jad Khalil and his sons control 55 percent of the stock. Jad Khalil is chairman of the board and CEO. He personally makes all major decisions with little consultation with the board of directors. Most of the directors, however, are either members of the Khalil family or long-standing friends. The board basically rubber-stamps Jad Khalil's decisions.

2. ALIA Corporation is one of several companies engaged in the manufacture of high- speed, high- capacity data storage devices. The industry is very competitive and subject to quick changes in technology. ALIAs operating results would place the company in the second quartile in terms of profitability and financial position. The company has never been the leader in the industry, with its products typically slightly behind the industry leaders in terms of performance