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Carly and Simon are discussing how best to approach the audit of accounts receivable and the related allowance accounts for one of their major audit
Carly and Simon are discussing how best to approach the audit of accounts receivable and the related allowance accounts for one of their major audit clients. Carly suggests that in order to save time, they simply obtain a small sample of around one percent of the population of receivables. Simon agrees, adding that if they do that, they can focus more time on other areas of the audit. What is the risk associated with Carly and Simon's plan, and how is the risk best explained? This type of risk is termed the risk of material misstatement. The risk of material misstatement is typically assessed as higher by the auditors when they have gained an understanding of the client and have determined that entity-level controls are effective and robust. The risk associated with Carly and Simon's plan is referred to as audit risk. This is the risk associated with the auditor rendering a different opinion on internal control than misstatements within the financial statements. The risk associated with Carly and Simon's plan is known as sampling risk. This type of risk pertains to the risk that the auditor reaches a different opinion based on the sample tested than he or she would if they tested the population as a whole. The risk associated with Carly and Simon's plan is referred to as inherent risk. This risk is present in all accounts for all firms in every industry It is the auditor's job to identify and eliminate inherent risk in order to be able to render a clean audit opinion
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