The following table describes different situations that an auditor may encounter. For Situation #1, answers have been provided regarding the impact on certain components of the Audit Risk Model. You will be asked a question regarding the impact this will have on Planned Detection Risk and Planned Evidence. For Situation #2, you will be asked a question regarding the impact on the components of the Audit Risk Model, Detection Risk, and Planned Evidence. Situation Acceptable AR IR CR Planned DR Planned Evidence Increase. 1. The client hired a new controller. He is not as competent in IFRS compared to the previous controller and he is not as experienced as the previous controller. ?? ?? Probably Reason: increase. New controller's No change. weakness in Reason: IFRS Not as increases familiar with chances of internal errors in controls. financial statements. 2. The shareholder-manager of the client has decided to sell her shares. Several parties are interested in buying the shares based on a business valuation of five times normalized earnings. ?? ?? ?? ?? ?? Situation #2: Assume that Situation #2 arose in the current year and you learned about this during the Planning phase of the audit. Consider the impact that Situation #2 should have on the Audit Risk Model and Planned Evidence, compared to prior year. Select all of the answers below which are correct. Inherent Risk should increase because the client lacks integrity. The Acceptable Level of Audit Risk should decrease because there are more users who will be relying on the financial statements. Control Risk should not change because there is no indication of any changes to the client's internal controls. The Acceptable Level of Audit Risk should increase because there is doubt about the owner's integrity, as evidenced by her desire to sell her shares. Inherent Risk should not change as there is no overt indication of any change in the client's desire to manage earnings. Control Risk should not change because there is a trade-off between the cost of implementing internal controls compared to the benefits to be derived. Planned Detection Risk should not change and, therefore, Planned Evidence should not change. Inherent Risk should decrease because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. This is an example of applying the audit risk model at an account-assertion level (i.e. a detailed level), as opposed to applying the audit risk model at a Financial Statement level (i.e. a high level). The Acceptable Level of Audit Risk should not change because the client is still a going concern. Planned Detection Risk should increase and, therefore, Planned Evidence should increase. Inherent Risk should increase because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. The Acceptable Level of Audit Risk should decrease because the current owner will be selling her shares. Control Risk should increase because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. Planned Detection Risk should increase and, therefore, Planned Evidence should decrease. Planned Detection Risk should decrease and, therefore, Planned Evidence should increase. Control Risk should increase because the auditor will want to test more of the internal controls due to the anticipated sale of the shares. Control Risk should decrease because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. Planned Detection Risk should decrease and, therefore, Planned Evidence should decrease. The Acceptable Level of Audit Risk should increase because there are more users who will be relying on the financial statements. Inherent Risk should not change because there is no new information to suggest any reason to change Inherent Risk. Control Risk should not change because there is no change to the practical/inherent limitations of internal control. This is an example of applying the audit risk model at a Financial Statement level (i.e. a high level), as opposed to applying the audit risk model at an account-assertion level (i.e. a detailed level). Inherent Risk should increase because there is a going concern problem. The following table describes different situations that an auditor may encounter. For Situation #1, answers have been provided regarding the impact on certain components of the Audit Risk Model. You will be asked a question regarding the impact this will have on Planned Detection Risk and Planned Evidence. For Situation #2, you will be asked a question regarding the impact on the components of the Audit Risk Model, Detection Risk, and Planned Evidence. Situation Acceptable AR IR CR Planned DR Planned Evidence Increase. 1. The client hired a new controller. He is not as competent in IFRS compared to the previous controller and he is not as experienced as the previous controller. ?? ?? Probably Reason: increase. New controller's No change. weakness in Reason: IFRS Not as increases familiar with chances of internal errors in controls. financial statements. 2. The shareholder-manager of the client has decided to sell her shares. Several parties are interested in buying the shares based on a business valuation of five times normalized earnings. ?? ?? ?? ?? ?? Situation #2: Assume that Situation #2 arose in the current year and you learned about this during the Planning phase of the audit. Consider the impact that Situation #2 should have on the Audit Risk Model and Planned Evidence, compared to prior year. Select all of the answers below which are correct. Inherent Risk should increase because the client lacks integrity. The Acceptable Level of Audit Risk should decrease because there are more users who will be relying on the financial statements. Control Risk should not change because there is no indication of any changes to the client's internal controls. The Acceptable Level of Audit Risk should increase because there is doubt about the owner's integrity, as evidenced by her desire to sell her shares. Inherent Risk should not change as there is no overt indication of any change in the client's desire to manage earnings. Control Risk should not change because there is a trade-off between the cost of implementing internal controls compared to the benefits to be derived. Planned Detection Risk should not change and, therefore, Planned Evidence should not change. Inherent Risk should decrease because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. This is an example of applying the audit risk model at an account-assertion level (i.e. a detailed level), as opposed to applying the audit risk model at a Financial Statement level (i.e. a high level). The Acceptable Level of Audit Risk should not change because the client is still a going concern. Planned Detection Risk should increase and, therefore, Planned Evidence should increase. Inherent Risk should increase because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. The Acceptable Level of Audit Risk should decrease because the current owner will be selling her shares. Control Risk should increase because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. Planned Detection Risk should increase and, therefore, Planned Evidence should decrease. Planned Detection Risk should decrease and, therefore, Planned Evidence should increase. Control Risk should increase because the auditor will want to test more of the internal controls due to the anticipated sale of the shares. Control Risk should decrease because management now has a greater motivation to overstate earnings because the formula for determining the purchase price is a function of earnings. Planned Detection Risk should decrease and, therefore, Planned Evidence should decrease. The Acceptable Level of Audit Risk should increase because there are more users who will be relying on the financial statements. Inherent Risk should not change because there is no new information to suggest any reason to change Inherent Risk. Control Risk should not change because there is no change to the practical/inherent limitations of internal control. This is an example of applying the audit risk model at a Financial Statement level (i.e. a high level), as opposed to applying the audit risk model at an account-assertion level (i.e. a detailed level). Inherent Risk should increase because there is a going concern