Question

1.CPA firms seek to maintain audit risk at a very low level.

a) Why this is important?

b) Under what circumstances could audit risk exceed the level established by firm policy?

2.An auditor determined overall materiality for the audit of a Las Vegas casino using total assets as

the basis for the calculation. Why would the auditor choose total assets instead of total revenues

or net income?

Answer 1

Question 1A:

Importance of Audit risk is that it is the risk which the auditor can tolerate from expressing an opinion on the audit of a company.

Audit risk is the function of Detection risk & control risk.

Auditor has to calculate the detection risk & control risk to find his audit risk. so as to provide a reasonable level of assurance.

In order to determine the assurance level, audit risk has to be determined. Hence, audit risk is to be established

Question 1B:

The audit risk may exceed the level established are:

• when the control risk are wrongly estimated
• when the detection risk are wrongly estimated

Question 2:

The auditor has choosen Total assets as a base for materiality as the casinos basically generate revenue mainly based on their assets. The base which is highly significant for a company to be choosen as a base for materiality.