The following is a partial balance sheet an auditor is examining during the planning [risk identification] phase of an audit of the 2020 Land’s End financial statements.

Land’s End
Consolidated Balance Sheets – USD ($) $ in Thousands	Dec. 31, 2020	Dec 31, 2019	Dec 31, 2018
Current assets
Cash and cash equivalents	$ 77,148	$ 193,405	$194,581
Restricted cash	2,149	1,948	2,356
Accounts receivable, net	50,953	34,549	49,860
Inventories, net	375,670	321,905	332,297
Prepaid expenses & other current assets	39,458	36,574	26,659
Total current assets	545,378	588,381	606,753
Property and equipment, net	157,665	149,894	136,501
Operating lease right-of-use asset	38,665
Goodwill	110,000	110,000	110,000
Intangible asset, net	257,000	257,000	257,000
Other assets	4,921	5,636	13,881
TOTAL ASSETS	1,113,629	1,110,911	1,123,135

Planning Phase Assumptions:

Assumptions 1: The target [maximum] for acceptable audit risk [AAR] is 0.07 or 7% risk

Assumption 2: The estimated risk of material misstatement [RMM] at this point in the audit is 0.21

Assumption 3: Tolerable error [tolerable misstatement] for each account within the statement of financial position [balance sheet] has been set at $ 90,000,000 [or $ 90,000 in $ 1,000s].

Accounts of interest: As indicated in the above balance sheet, the audit manager has highlighted two accounts for you to analyze and discuss:

• Cash & Cash Equivalents
• Accounts Receivable, Net

Your answers should be based completely on the evidence indicated in the balance sheet.

QUESTIONS: [Enter your answers in the indicated boxes. Expand the box size as needed].

Question 1 [15 pts]: As discussed in our Zoom classes, ‘Audit Risk’ involves more than the standard definition provided by the AICPA or PCAOB. For example I argued there are two important types related to deciding on the audit opinion, that is ‘Type I’ and ‘Type II’ audit risk.

1. Explain the difference between these two kinds of audit risk

2. For each type, provide one possible cause of the risk:
   1. Type I risk
3. Type II risk

Question 2 [5 pts]: Who usually sets acceptable audit risk?

Question 3 [5pts.] Given the three assumptions listed above, what is the detection risk [DR] needed to achieve the target Audit Risk?

Discussion of Cash & Cash Equivalents

Question 4 [10 pts]: Considering only the evidence in the above balance sheet, what would be a reasonable auditor’s expectation for the Dec. 31,2020 balance of Cash & Cash Equivalents? Show your calculations and provide reasoning to indicate why it is a reasonable way of calculating the auditor’s expectation:

Question 5 [10 pts]: The difference between the auditor’s expectation and the unaudited amount provides as estimate of possible misstatement. Calculate that difference and indicate whether is it evidence of overstatement or understatement:

Question 6 [10 pts]: Indicate whether this difference is audit important or not audit important. Explain your reasoning for your answer:

Question 7 [10 pts] If the auditor decides that the difference is audit important and that the unaudited balance does not meet the auditor’s expectation, what are the auditor’s normal next steps?

Questions 8 [10 pts]: Given the possible misstatement in cash & cash equivalents , what other balance sheet account[s] are possibly misstated and would they be understated or overstated?

Discussion of Accounts Receivable, Net:

Question 9 [10pts ]: Considering only the evidence in the above balance sheet, what would be a reasonable auditor’s expectation for the Dec. 21, 2020 balance of Accounts Receivable, Net? Show your calculations and indicate why it is a reasonable way of calculating the auditor’s expectation:

Question 10 [10 pts]: The difference between the auditor’s expectation and the unaudited amount provides as estimate of possible misstatement. Calculate that difference and indicate whether is it evidence of overstatement or understatement:

699

Question 11 [5 pts]: The above difference, whether audit important or not, indicates at least one assertion related to Accounts Receivable is not valid. Indicate

1. Indicate which assertion is most likely not to be valid and why you think it is most likely for Land’s End

2. What error in the accounting system could have resulted in the assertion mot being valid?