Question
Audit risks for particular accounts and disclosures can be conceptualised in a model such that Audit risk (AR) = Inherent risk (IR) x Internal control
Audit risks for particular accounts and disclosures can be conceptualised in a model such that Audit risk (AR) = Inherent risk (IR) x Internal control risk (CR) x Detection risk (DR). Using this audit risk model as a framework and decide whether the auditors conclusion in each of the independent situations below is appropriate. a. Wendy, a CPA, has participated in the audit of a listed company, Forrest Ltd. for the past five years. At the start, she worked as an audit trainee for the job; for the past two years, she was the supervisor in charge. In her experience, she has never seen an audit adjustment to be put through to the financial statements prepared by the client. Wendy was the manager in charge of this job for the current year and she believed that the inherent risk must be zero. (6 marks) b. Alex, a CPA, has just completed a thorough evaluation and testing of the internal controls of an audit client, Carmen Ltd. up to 30 November 2022. Due to the fact that not a single error was found during his review and testing of the internal controls, Alex concluded that the control risk should be zero. Carmen Ltd. has its financial year ending on 31 December. (8 marks)
c. Serena, a CPA, was assigned to audit a medium sized fashion retailing company, Connie Ltd. Serena claimed that when control risk is high, detection risk is also high given the audit risk and inherent risk remain constant. Do you agree? Explain your answers (Instead of providing mathematical reasons, it is important to offer the intuition behind a concept
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