.

Use the following information to answer the questions below:

The firms policy is as follows:

Audit Risk Model
AR	=	RMM	x	DR
		LOW		LOW
VERY LOW		LOW		MODERATE
		MODERATE		LOW
		HIGH		VERY LOW
		LOW		HIGH
LOW		MODERATE		MODERATE
		HIGH		LOW
		LOW		HIGH
MODERATE		MODERATE		HIGH
		HIGH		MODERATE

The auditor has planned an audit program for testing as follows:

• Materiality is $1M.
• AR is VERY LOW.
• RMM is HIGH.
• DR is VERY LOW.
• AR = RMM x DR.
• VERY LOW(AR) = HIGH (RMM) x VERY LOW(DR) (Current setting by the audit team, based on information above.)

The following are the only available options for testing. The audit managers initial choices are in boldface:

N/T/E	Option 1	Option 2	Option 3
Nature of principal audit procedure:	a. Negative confirmation.	b. Vouching/Tracing to third party documents,	c. Positive confirmation
Extent of principal audit procedure:	d. 50 invoices,	e.75 invoices	f. 100 invoices.
Timing of principal audit procedure:	g. July 31st	h. September 30	i. December 31
Risk Setting Choices:
J. Very Low	K. Low	L. Moderate	M. High

Therefore, the auditor is currently choosing the following: c. positive confirmations, f. 100 invoices, & i. December 31. Suppose that the engagement partner changes the planned AR to LOW & RMM to MODERATE. Therefore, the new audit risk formula becomes: LOW(AR) = Moderate (RMM) x _____________(DR) What effect would this change to the audit formula have on the audit procedures? (Answer the questions below.) (Think about efficiency & effectiveness of the procedures.) [Use the information above to answer the questions below.) [For each question below respond by writing the question you are answering and your answer: EX: i.J. Very Lowe, ii.A/B- Increased/decreased, etc.]

i. What would be the new setting for Detection Risk(DR) ? ___________________________. (Use the settings above EX: J. Very Low) [Use the choices provided in the table above to answer] [Spelling counts]

j. VERY LOW

k. LOW

L. MODERATE

M. HIGH

ii. What effect will the DR change above have on the amount of Evidence needed by substantive Testing ______________________. (Will it N. Increased amount of Evidence needed, O. Decreased amount of Evidence needed, or P. Same amount of Evidence needed.) [Use the choices provided below to answer] [Spelling counts]

N. Increased amount of Evidence needed

O. Decreased amount of Evidence needed

P. Same amount of Evidence needed

Z. Cannot be determined/ None of the above.

iii. The effect on Nature? ______________________________________________________________________. (Pick from the three choices in the table, include the letter choice in the table: EX: use a. Negative confirmation.)[Use the choices provided to answer] [Spelling counts]

a. Negative confirmation

b. Vouching/Tracing to third party documents,

c. Positive confirmation only

Z. Cannot be determined/ None of the above.

iv. The effect on Extent? _______________________________________________________________________. (Pick from the three choices in the table, include the letter choice in the table: EX: use a. Negative confirmation.)[Use the choices provided to answer] [Spelling counts]

d.50 invoices

e.75 invoices

f.100 invoices

Z. Cannot be determined/ None of the above.

v. The effect on Timing? ______________________________________________________________________.

(Pick from the three choices in the table, include the letter choice in the table: EX: use a. Negative confirmation.) [Use the choices provided to answer] [Spelling counts]

g. July 31

h. September 30

i. December 31

Z. Cannot be determined/ None of the above.

vi. What impact would the above change to DR have on Materiality? (Assuming since DR changed above materiality will also change slightly.)_______________________________________________________. (Q.Materiality will Increase or R.Materiality will Decrease.) [Use the choices provided to answer] [Spelling counts]

q. Increase

r. Decrease

s. Stay the same

Z. Cannot be determined/ None of the above.