Question 2 (12 points) EDGERTON INC.: You are a staff accountant working with your Audit Manager, Michele Teper, on an engagement with Edgerton Inc., the auditee. The Audit Firm always sets its overall Audit Risk at exactly the same level for every audit engagement, at a generally low risk level (if a number were to be assigned, the Audit Firm would say it likes Audit Risk = 5% which it considers to be "LOW"). In a conversation with Michele, you hear her say the following: B: "On this Edgerton Inc. audit, I see that the company does business in a highly cyclical industry and it has many related party accounting transactions. Furthermore, Edgerton had a very large acquisition during the year we are auditing: Edgerton bought 100% of the shares of Francis Corporation, a company approximately the same size as Edgerton. This is an unusual transaction for the company. Obviously, you can tell from these comments what I think of the risk level associated with those elements, 4: As for Edgerton's procedures for detecting and/or preventing a material misstatement in its financial reporting, my assessment is that they are moderately effective. Not perfect or near perfect, but at the same time, not bad and not poor. Just moderate." REQUIRED: acer 0 # 1 $ 4 % 5 & 7 3 * 00 6 9 0 e r t u 1 O f g h j b m REQUIRED: Given this information, explain the following: (a) Describe inherent Risk, Control Risk and Detection Risk as used in the Audit Risk Model (explain in your own words) and include reference to the role of the Auditor as it relates to all three risks. B: (b) What risk level is Michele the Audit Manager most likely to attribute Edgerton's Inherent Risk and Control Risk? Choose from HIGH, MEDIUM or LOW for risk levels. Ensure you explain WHY you selected the specific risk level for both the Inherent Risk and the Control Risk. 4: (c) Explain the implication of your answer to part (b) on what Michele will advise the Audit Firm to do with respect to Detection Risk (i.e. what is a reasonable implication on choices the Audit Firm will make for its Audit Plan). Ensure you explain WHY. Choose from HIGH, MEDIUM or LOW for risk levels. Paragraph BIU acer C DII ^ $ 4 % 5 3 & 7 6 8 9 0 e . t u O g h j k