Question

Assume you are engaged to audit ABC corp.  They are a privately held construction company with two shareholders..  They are seeking a bank loan of $1,000,000 for expansion.   All of their construction projects are of similar nature and are in the state of Georgia.  The shareholders place great emphasis on the quality of their financial statements and adherence to ethical business practices.  One of the shareholders was a former auditor and places great emphasis on having robust and effective internal controls.

INDICATE YOUR INITIAL PLANNING JUDGMENTS: (Low, Medium, High)

AR	IR	CR	DR
Initially set at _____	You assessed	You assessed	You computed

Here are the Questions you will answer in D2L?

1. Based on your INITIAL Planning judgments, do you expect the amount of audit evidence required to be (LOW, MEDIUM, or HIGH).  

2. If it was determined that the internal controls of the company were weak instead of strong, would control risk Increase or Decrease?  

3. If ABC corp. was a publicly traded company instead of a privately held company would your AR (Audit Risk) Increase or Decrease?  

4. If for the above client you set the following materiality levels:

• Planning Materiality   $100,000
• Tolerable Error          $  10,000
• Posting Materiality     $   1,000

During the audit you determined that ABC’s supplies expense was understated by $550.  What is the most likely course of action you will take?

1. Send a memo to management informing them of the discrepancy
2. Advise the Partner in charge of the audit
3. Make an adjusting entry to correct the discrepancy
4. Pass (perform no additional work or action) due to the immateriality of the amount

Answer 1

Answer.1. If the controls are good and errors are Low, then Audit evidence is expected to be Low and simlilarly.

2. If it was determined that Internal Controls of the Company are weak, then the Control Risk would Increase.

There can be lapses in the internal control system which could pose threat and lead to misstatement or fraud.

3. If ABC Corp was a Pulic Company, then the Audit Risk would Increase due to increased level of transactions and other Statutory Obligations.

4. If During the audit you determined that ABC’s supplies expense was understated by $550, the most likely course of action would be:

D. Pass (perform no additional work or action) due to the immateriality of the amount.