its components. The firm of Pack & Peck evaluates the risk of material isstate--1,4-2, 4-34-27 When planning a financial statement audit, a CPA must understand au skits components. The firm of Pack & Peck evaluates the risk of materiaiment (RMM) by disaggregating RMM into its two components: inherentisk andcontrol 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 allComponents of Audit Risk:a. Control riskb. Detection riskc. Inherent riskComponentof Audit RiskIllustration1. A client fails to discover employee fraud on a timely basis because bank accountsare 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 norelated 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. 4-54 28

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Answered: COnroI TISK. Required: For each…

COnroI TISK. Required: For each illustrat trated. The comp Components of A a. Control risk b. Detection risk c. Inherent risk

Auditing: A Risk Based-Approach to Conducting a Quality Audit

10th Edition

ISBN:9781305080577

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter7: Planning The Audit: Identifying, And Responding To The Risk Of Material Misstatement

Section: Chapter Questions

Problem 17MCQ

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