Your firm plans audit programs based on the following expanded version of the audit risk model:

AR = RMM x DR ,

The risk levels are MAXIMUM [that is, 100%], MODERATE, LOW, and VERY LOW. Assume that the audit risk AR is never greater than the risk associated with the lowest risk component [remember that low risk is good]. If the detection risk is low, then the audit risk cannot be greater than low. Nevertheless, even though control risk may be low, the auditor must still perform substantive tests [because GAAS requires substantive tests no matter how effective the controls are]. To reduce AR to LOW, at least two risk components on the right side of the audit risk model must be MODERATE or better. To reduce AR to VERY LOW, at least one risk component must be VERY LOW, or three components must be MODERATE.

The auditor has planned an audit program for testing the existence and valuation assertions of accounts receivable. Materiality is $1,000,000 and the planned AR is LOW. CR is expected to be MODERATE. Planned TD is MODERATE. The following are the only available options for testing. The audit managers choices are in boldface:

Nature of principal audit procedure: confirmation [positive or negative], analytical procedure.

Extent of principal audit procedure: 50 accounts, 100 accounts, 200 accounts.

Timing of principal audit procedure: October 31, November 30, December 31.

If the auditor confirms receivables before year-end, then analytical procedures and further tests of controls will be performed on data covering the remaining portion of the fiscal year. AP is MODERATE, regardless of when the confirmations are performed.

BASE YOUYR RESPONSES ON THE CASE FACTS.

1. Assume that the engagement partner changes the planned AR to VERY LOW. Considering each factor independently[assuming that each one changes, but not the other two], what would be the effect on the confirmations [which are tests of details] regarding:

a. nature?

b. extent?

c. timing?

d. Does DR increase, decrease, remain the same, or is it not determinable from the information?

2. Suppose that the auditor has tested controls and has revised RMM to reflect the test results. RMM is now LOW. Considering each factor independently[assuming that each one changes, but not the other two], what would be the effect on the confirmations [which are tests of details] regarding:

a. nature?

b. extent?

c. timing?

d. Does DR increase, decrease, remain the same, or is it not determinable from the information?

3. Suppose the engagement partner has increased materiality from $1,000,000 to $1,500,000. Planned AR and CR are unchanged.

a. To keep DR changed, would the extent of substantive tests incraes, decrease or remain the same?

b.What would be the effect on timing of substantive tests.