Auditon need to assess audit risk in planning an audit engagement. In doing so he may adopt the audit risk model to help determine the amount of planned evidence in the audit. The audit risk formula can be written as AAR-IR x CR x PDR.

Give the name and definition of each risk in the formula. Explain how the aoditor determines the amount of planned evidence uning the audit risk model

b) Tom is the auditor who is assigned to audit a new client, which is a private company, Tom found that there are intemal controls in different departments ed there are also internal auditors in the company to oversee the operation of different departments frequently. Tom therefore assessed the AAR as high, IR as high and CR low

Explain whether you agree with Tem's risk assessment and determine the suitable amount of planned evidence in this wodit for Tom. Your explanation should include a separate discussion of each risk assessed by Tom.

c)Suppose Tom has completed the audit for the client in (b) In the second year, the client again approached Tom for the audit. There were changes noted by Tom when discussing with management: The company has expanded quickly recently with business in some new areas. The company is planning to have the Initial Public Offering to get more funds for expansion. The company did not hire extra staff in the Accounting department due to the increasing workload and this led to frequent staff turnover.

(I)Tom remembered that the audit firm has to consider only new client acceptance and believed that he can continue to perform the audit for the client without much consideration since he had audited the client last year. Discuss whether you agree with him. If no, explain some of your considerations.

(ii) Now that Tom is preparing to start the second year audit for the client. Tom is considering whether he should revise any level of risks in AAR, IR and CR from the level assessed in (b) last year. Stale and explain the new level of risks and a suitable amount of planned evidence based on the information given.

(iii) Will the aadit plan in the second year for the evidence mix (extent of the test of controls, substantive test of transactions and test of details of balance) be the same as that in the first year.? Explain the reason and any difference of evidence mix you will consider.