Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. In each of the events a to j, circle one letter for each of the three independent variables and planned evidence: I = increase, D = decrease, N = no effect, and C = cannot determine from the information provided.
a. The client’s management materially decreased long-term contractual debt:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
b. The company changed from a privately held company to a publicly held company:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
c. The auditor decided to set assessed control risk at the maximum (it was previously assessed below the maximum):
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
d. The account balance increased materially from the preceding year without apparent reason:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
e. You determined through the planning phase that working capital, debt-to-equity ratio, and other indicators of financial condition improved during the past year:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
f. This is the second year of the engagement, and there were few misstatements found in the previous year’s audit. The auditor also decided to increase reliance on internal control:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
g. The client began selling products online to customers through its Web page during the year under audit. The online customer ordering process is not integrated with the company’s accounting system. Client sales staff print out customer order information and enter that data into the sales accounting system:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
h. There has been a change in several key management personnel. You believe that management is somewhat lacking in personal integrity compared with the previous management. You believe it is still appropriate to do the audit:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
i. In auditing inventory, you obtain an understanding of internal control and perform tests of controls. You find it significantly improved compared with that of the preceding year. You also observe that because of technology changes in the industry, the client’s inventory may be somewhat obsolete:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C
j. In discussions with management, you conclude that management is planning to sell the business in the next few months. Because of the planned changes, several key accounting personnel quit several months ago for alternative employment. You also observe that the gross margin percent has significantly increased compared with that of the preceding year:
Control risk I D N C Acceptable audit risk I D N C
Inherent risk I D N C Planned evidence I D N C