Chapter 9 Materiality and Risk - HCC Learning Web

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9-32 a. Low, medium, and high for the four risks and planned evidencehave meaning only in comparison to each other. For example, anacceptable audit risk that is high means the auditor is willing toaccept more risk than in a situation where there is medium riskwithout specifying the precise percentage of risk. The same is truefor the other three risk factors and planned evidence.b.1 2 3 4 5 6Acceptable Audit Risk H H L L H MIR x CR L M H M M MPDR = AAR / (IR x CR) H M L L M MPlanned Evidence L M H H M ML = low, M = medium, H = highc.EFFECT ONPDR(1) Increase(2) Decrease(3) NA(4) Decrease(5) No effectEFFECT ONEVIDENCEDecreaseIncreaseDecreaseIncreaseNo effect9-33Risk Factor Related Audit Risk Model Component1. Acceptable audit risk2. Control risk3. Acceptable audit risk4. Inherent risk5. Planned detection risk6. Acceptable audit risk7. Inherent risk8. Inherent risk9. Planned detection risk10. Control risk9-12
9-34CONTROLRISKINHERENTRISKACCEPTABLEAUDIT RISKPLANNEDEVIDENCEa.b.c.d.e.f.g.h.i.j.NNDNNDIIIDN or INNINDIIIIDDNNINNDNNIIDIDDIIIC• Cases9-35FACTOREFFECT ON THERISK OF MATERIALMISSTATEMENTAUDIT RISKMODELCOMPONENT1. Henderson is a new client. Increases Inherent risk2. Henderson operates in aregulated industry, whichincreases regulatory oversightand need for compliance withregulations.3. The company’s stock is publiclytraded.4. The company is more profitablethan competitors, but recentgrowth has strained operations.5. The company has expanded itsuse of derivatives and hedgingtransactions.6. Henderson has added competentaccounting staff and has aninternal audit function with directreporting to the audit committee.IncreasesIncreasesIncreasesIncreasesDecreasesAcceptable auditriskAcceptable auditriskAcceptable auditriskInherent riskControl risk9-13
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Chapter 9 Materiality and Risk - HCC Learning Web

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