bers, 4,5,6,7,8,9,10 determining risks
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Numbers, 4,5,6,7,8,9,10 determining risks
Transcribed Image Text:its components. The firm of Pack & Peck evaluates the risk of material isstate-
-1,4-2, 4-3
4-27 When planning a financial statement audit, a CPA must understand au sk
its components. The firm of Pack & Peck evaluates the risk of materiai
ment (RMM) by disaggregating RMM into its two components: inherentisk and
control risk.
Required:
For each illustration, select the component of audit risk that is most directly illus-
trated. The components of audit risk may be used once, more than once, or not at all
Components of Audit Risk:
a. Control risk
b. Detection risk
c. Inherent risk
Component
of Audit Risk
Illustration
1. A client fails to discover employee fraud on a timely basis because bank accounts
are not reconciled monthly.
2. Cash is more susceptible to theft than an inventory of coal.
3. Confirmation of receivables by an auditor fails to detect a material misstatement.
4. Disbursements have occurred without proper approval.
5. There is inadequate segregation of duties.
6. A necessary substantive audit procedure is omitted.
7. Notes receivable are susceptible to material misstatement, assuming there are no
related internal controls.
8. Technological developments make a major product obsolete.
9. The client is very close to violating debt covenants.
10. XYZ Company, a client, lacks sufficient working capital to continue operations.
3, 4-4. 4-5
4 28
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