Audit risks for particular accounts and disclosures can be conceptualized in this model: Audit risk (AR) = Inherent risk (IR) Internal control risk (CR) Detection risk (DR).

Required:

Use this model as a framework for considering the following situations and deciding whether the auditors conclusion is appropriate:

a) Orkun, PA, has participated in the audit of Lara Cheese Company for five years, first as an assistant accountant and the last two years as the senior accountant. He has never seen an accounting adjustment recommended. He believes the inherent risk must be zero. (3 marks)

b) Jennifer, PA, has just (November 30) completed an exhaustive study and evaluation of the internal control system of Long Dara Foods Inc. (fiscal year ending December 31). She believes the control risk must be zero because no material errors could possibly slip through the many error-checking procedures and review layers used by Long Dara. (3 marks)

c) Fatsa PA, is lazy and does not like audit jobs in Toronto, anyway. On the audit of Howard Manufacturing Company, he decided to use detail procedures to audit the year-end balances very thoroughly to the extent that his risk of failing to detect material errors and irregularities should be 0.02 or less. He gave no thought to inherent risk and conducted only a very limited review of Howards internal control system. (4 marks)