[janep78]

1. If client hired a CFO without any related experience. What would happen to CR, IR and incorrect acceptance? Increase? Decrease or no impact?

CR (no impact), IR( increase),incorrect acceptance (decrease) ???

2. CFO made an aggressive sales projection for the next 3 years without any change in sales. What would happen to CR, IR and incorrect acceptance? Increase? Decrease or no impact?

CR (no impact), IR( increase),incorrect acceptance (decrease) ???

For the Audit Risk, wiley’s book shows

AR=IR X CR X DR

AR= IR X CR X AP X TD

AP- Anylytical procedures risk and other relevant substantive tests

TD-Test of details allowable risk of incorrect acceptance for this substantive test

Please help!!!!

[janep78]

Someone please help, I am so confused about this question. Especially the relationship between RMM and incorrect acceptance. Becker didn't do too much illustration on this but I see it in the exam twice.

[fg]

Could some one help on this quesiton?

Thanks!

[hopefulcpa28]

1. CR wouldn't matter, IR would go up….and I don't think it has any effect on incorrect acceptance as that relates to Variable sampling. Incorrect acceptance is a risk “that the sample supports the conclusion that the recorded account balance is not materially misstated when in fact it is materially misstated.” Basically, the sample failed to identity an existing material misstmt.

However, because IR went up, auditor's acceptable lever of audit risk and risk of incorrect acceptance should decrease….because expected misstmt went up (IR is high).

2. Same goes for #2.

yeah, someone please help!! I'm confused as well…

[fg]

Could someone give advice on this question? Becker does not have any examples I could look up and compare, thanks!!!

[Yvonne570]

#2 – inherent risk increase, which would have no impact to control risk.

Hence, when there is increased inherent risk, controls go out the window – cannot be relied upon; therefore, no test of controls. Substantive test of details at a greater level is required – that is if there is no signs of fraud or illegal acts (withdraw).

Incorrect acceptance is the sampling risk in which creates an audit risk of detection due to overreliance on sampling results – not taking into account of the other factors. In essense, not smart with evident inherent risk – tone at the top is showing signs of cooking the books. Auditors are responsible for identifying risks accurately – and not with blindfolds.

It's like having too much trust and saying “yes, we sampled enough to support an unqualified opinion”. Yet, later on, the auditor found out they missed a material misstatement.

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[Yvonne570]

Think of it like the basic formula AR = IR x CR x DR.

An increase in inherent risk and/or control risk reduces detection risk

---

auditor has to do more work. Both cases present an increase in inherent risk, which makes controls so unreliable, testing would not be good (as testing is done with reliable controls). Theres more risk – sampling is part of that lovely detection area of audit work. The alpha and betas are a component of this.

AUD - Passed:)
FAR - Passed:)
REG - Retake TBD
BEC - Missed by 3 points Retake TBD

[Author]

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