Assignment 2
Assignment 2
Part A
When planning a financial statement audit, an auditor must understand audit risk and its components.
Components of Audit risk:
a. Auditor’s business risk
b. Control risk
c. Detection risk
d. Inherent risk
Illustration Component of Audit Risk
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 accounts receivable 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. An auditor complies with auditing standards on an audit engagement, but the shareholders sue the auditor for issuing misleading financial statements.
10. ABC Company, a client, lacks sufficient working capital to
Continue operations. _________________________________________________________________
Required:
For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all.
Part B
The Hong Kong Arts Society (HKAS) operates a museum for the arts appreciation and benefit of the community. When the museum is open to the public, two clerks who are positioned at the entrance collect a $10 admission fee from each nonmember patron. Members of the HKAS are permitted to enter free of charge upon presentation of their membership cards.
At the end of each day, one of the clerks delivers the cash proceeds to the treasurer. The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon, the treasurer and one of the clerks deliver
Part A
When planning a financial statement audit, an auditor must understand audit risk and its components.
Components of Audit risk:
a. Auditor’s business risk
b. Control risk
c. Detection risk
d. Inherent risk
Illustration Component of Audit Risk
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 accounts receivable 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. An auditor complies with auditing standards on an audit engagement, but the shareholders sue the auditor for issuing misleading financial statements.
10. ABC Company, a client, lacks sufficient working capital to
Continue operations. _________________________________________________________________
Required:
For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all.
Part B
The Hong Kong Arts Society (HKAS) operates a museum for the arts appreciation and benefit of the community. When the museum is open to the public, two clerks who are positioned at the entrance collect a $10 admission fee from each nonmember patron. Members of the HKAS are permitted to enter free of charge upon presentation of their membership cards.
At the end of each day, one of the clerks delivers the cash proceeds to the treasurer. The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon, the treasurer and one of the clerks deliver