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Fatme and Diane, two auditors who have separate accounting practices, have independently assessed the risks associated with a perspective client. The appropriate audit risk for
Fatme and Diane, two auditors who have separate accounting practices, have independently assessed the risks associated with a perspective client. The appropriate audit risk for both is determined to be .05. Both agree that inherent risk should be set at the maximum (1.0) and that no analytical procedures will be performed. Fatme evaluates control risk as moderate (.40), while Diane assesses it as relatively low (-25). Using the audit risk model, answer the following questions. Part A. Calculate the risk of incorrect acceptance (RIA) for Fatme and for Diane? (2 marks) Part B. Based on your answer in part (A), which auditor will have to collect more evidence? Explain your reasoning. (3 marks) Part C. Fatme accepted the audit and set materiality at 0.5% with performance materiality of 90%. During the test of accounts, Fatme's team determined the accounts payable general ledger value was $96,500 with 125 customer transactions. For the account payable, the audit team selected a sample size of $25,700 using 35 customer transactions. The result of the audit procedures returned a value of $24,190 for the samples selected. Calculate the projected likely misstatement (PLM) using the ratio method and determine what action is required by Fatme and her team (show your work and explain your decision 7 marks)
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