@lab122
First: How is net income affected by the following independent situations?
1.) Accrued expense needs to be adjusted down.
If expenses are ADJUSTED DOWN (reducing the over expensed account) then NI increases.
For instance, Rev: $1000 & Exp (before ADJ): $600 then NI (before ADJ) = $400
If Expenses adjusted down: $1000 – $500 = NI (after ADJ) $500
> NI went up by $100.
2.) Rent expense need to be adjusted up.
Rev: $1000 & Exp (before ADJ): $600 then NI (before ADJ) = $400
If Expenses adjusted up: $1000 – $700 = NI (after ADJ) $300
> NI went down by $100.
3.) Accrued payroll needs to be adjusted up.
Rev: $1000 & Exp (before ADJ): $600 then NI (before ADJ) = $400
If Expenses adjusted up: $1000 – $700 = NI (after ADJ) $300
> NI went down by $100.
Basically is net income affected by these and how?
Second: Control Risk and Detection Risk – How are they affected?
The auditor cannot change the control risk, only he/she can assess it and decide on the extent of the substantive tests to lower the DETECTION RISK. The auditor, however cannot take a stance on the CONTROL RISK after considering the extent of substantive tests (DR). Its only a oneway street —-> Assess CR first then decide on the DR (substantive tests) not vice versa.
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