[williamcwlee]

It is a simulation from Becker Final Review

Brown, CPA, is evaluating the risk of material misstatement on an engagement. For each of the following, identify the risk component most directly affected and indicate what effect the situation described would have on this risk.

1. The entity keeps a large quantity of cash on hand.

Obviously this situation increases IR, my question is: how do CR and DR change? I think it has no impact on CR and DR will decrease, am I right?

2. Brown plans to perform all of its testing related to cash at YE.

Obviously this situation decreases DR, my question is: does it have any impact on IR and CR?

Thank you!!!

FAR-80
BEC-85
AUD-4/21/2013
REG-8/31/2013

[mla1169]

for the first one, there is absolutely an increase to control risk. Keeping a large amount of cash on hand is a weakness in internal control.

It's been long time since I sat for aud but I think doing all testing at YE increases detection risk (because there is a larger volume to test)

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[jsmithsae]

william…the question asks which one is most directly affected and why…you have the correct answers.

1. IR-cash is inherently a risk

2. DR-the only risk you can change…and moving tests to YE reduces DR.

Don't over think it…RTMFQ

BEC-75!
AUD-84!
REG-78!
FAR-83!
Ethics-Passed!
Experience-Got that too

Used Becker 2013 Self-Study & NINJA 10pt Combo Lite(AUD)

[lbi18]

For the second one, I would assume that DR would decrease because performing tests at YE is less likely to lead to a material misstatement than doing it an an interim date.

I feel like the increase in IR or CR is subjective – I would say CR and IR would be reassessed to a higher level because there is a reason why you are performing at YE (in other words, if CR and IR were low, you would be comfortable with performing tests at an interim date). In addition, there is that inverse relationship between CR/IR and DR.

That's just my take on this. Let us know what Becker's answers say and why.

FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)

Using Becker Self-Study

[jsmithsae]

Lbi you are applying a fact from the second question as if it applies to the first…take each one separately.

Remember, you cant change IR or CR. At what point in the fact pattern does it say anything about controls being ineffective in question 1?

If someone says there is a boat load of cash around it instantly becomes an IR. Now, imagine, a bank…does that mean their CR is high? no, because they have proper controls in place…but the cash is still inherently more risky.

BEC-75!
AUD-84!
REG-78!
FAR-83!
Ethics-Passed!
Experience-Got that too

Used Becker 2013 Self-Study & NINJA 10pt Combo Lite(AUD)

[williamcwlee]

@jsmithsae

Thank you. I would like to know whether an auditor will extent the substantive testing when the IR and CR remain the same.

@lbi18

What I mentioned in the first thread are the right answers from Becker. So, you are right. Thank you.

FAR-80
BEC-85
AUD-4/21/2013
REG-8/31/2013

[williamcwlee]

@jsmithsae

the fact pattern does not say anything about the control

FAR-80
BEC-85
AUD-4/21/2013
REG-8/31/2013

[jsmithsae]

that's my point…why assume controls are bad? the obvious answer was IR, trying to make a CR justification will only lead to an incorrect answer for each of my reasons above. if there was any mention of control issues we could have a different answer.

I think we all have tried to over think the questions…sometimes the simple answer is the right answer.

BEC-75!
AUD-84!
REG-78!
FAR-83!
Ethics-Passed!
Experience-Got that too

Used Becker 2013 Self-Study & NINJA 10pt Combo Lite(AUD)

[lbi18]

@jsmithsae I never disagreed with you on the first one nor did I mention the first one at all in my answer.

I was just saying that an auditor may perform tests at YE because of high CR or IR – that's all. I know an auditor cannot changed these physically (like DR), but the assessment of them can be changed.

FAR - 85
AUD - 99
REG - 85
BEC - 10/4/13 (Waiting)

Using Becker Self-Study

[SeattleAccountant]

Me thinks this type of question has to answered by looking into the formula: AR = [IRxCR] x DR and recalling that when CR or IR individually and/or jointly increase, DR goes up and vise versa.

1. The entity keeps a large quantity of cash on hand. IR goes up, DR goes down.

In order to get DR low, auditor must perform more work (bigger sample size, YE testing, etc.)

2. B/S item-Cash is audited at the YE. Great news, what's what needs to be done in order to be sure that the amount stated is in fact as such. IR associated with cash is always high, DR goes down (see above).

Becker Class of Jan - Aug 2013: FARB DONE!!!!
CPA license pending 🙂

[MintsRGood]

This is classic RTMFQ auditing hell!!!! The key is to focus on the phrase “MOST DIRECTLY” affected! If they are only looking for one answer then the most clear cut answer is the best choice! Without question a large quantity of cash on hand creates more inherent risk and without question testing at year-end decreases detection risk, so give them only what they are asking for! The devil is in the details with auditing and it's easy to read too much in to the question…but don't!

Just give them ONLY what they are asking for…which in this case is component “most directly” affected. This is why I hate auditing so much!!!!!!!!!!!! 😉

REG: 75 DONE 🙂
AUD: 61, 71, 68, 92 DONE 🙂
BEC: 76 DONE 🙂
FAR: 72, 74, 79 DONE 🙂
Licensed Michigan CPA 🙂
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