You are considering acceptable audit risk at the financial statement level. For

Question

You are considering acceptable audit risk at the financial statement level. For each of the following independent scenarios, based only on the information provided, indicate the effect on acceptable audit risk compared to a typical private company audit.

a. LVD is a pharmaceutical company that has three successful drugs. They have recently decided to make a public offering of their stock.

b. Budd Co., a private company, has approached your audit firm to bid on their annual audit. During discussions with the CFO, you learn that the company is filing for bankruptcy.

c. Stephens Inc., a private company, has recently installed a new accounting information system.

Explanation / Answer

a)Issue of new stock has a limited effect on acceptable risk as all process of issue is undertaken by a professional person (merchant banker).so there is less chances for fraud and thus risk

b)There is a unfavorable effect on acceptable risk has a the company is already in the process of bankruptcy .

c) There is a unfavorable effect as new accounting system with new technology also brings more risk in terms of more fraud .When there is a new accounting system installed ,it will require time to be understandable and there is a chances that we unable to conduct audit effectively.

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