Suppose a firms planning audit guidelines specify the following risk level ranges for AR, RMM and DR.The firms risk ranges, for any materiality amount, are:

VERY LOW5%

LOW

MODERATE10% to 30%

HIGH

(The reason that the upper end of each range equals to the lower end of the next riskier range is for practicality, in view of the fact that the specifications are inherently imprecise.) These ranges are modified according to the type of risk, as described below.

Audit Risk: If an auditor doesnt specify a risk level for AR, the auditor must specify a category (VL, L or M, but not H). The firms planning software will then assume that VL=1%, L=5% and M=10%.

Risk of Material Misstatement: If the auditor doesnt specify a risk level for RMM, the auditor must specify a category (VL, L or M or H). The firms planning software will then assume that VL=5%, L=5%, M=10% and H=100%.

Detection Risk: The auditor should specify a percentage for DR that is consistent with AR and RMM. That is, DR = AR / RMM and is dependent on the auditors choices of AR and RMM. If application of the risk levels for AR and RMM, pursuant to the above guidelines, results in DR50%, then the auditor sets DR=50%.

Suppose the auditor specifies only the categories for AR and RMM. Briefly explain the reason for the firms software planning tool setting AR to the low end of the range for each category and RMM to the high end of the range for each category.

A. The auditor sets AR to LOW, and RMM to MODERATE. Calculate DR in accordance with the planning guideline.

B. The auditor sets AR to LOW, and RMM to HIGH.Calculate DR in accordance with the planning guideline.

C. The auditor sets AR to MODERATE, and RMM to LOW.Calculate DR in accordance with the planning guideline.

3. A. Assuming that scope of the examination remains constant , what effect does increasing the

Materiality amount have on DR? On AR?

B. If M is increased but AR and DR are unchanged, what is the effect on the scope of the

examination