Need help confused!!! 2. You have just been hired by the Dima Accounting Firn. Y

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Need help confused!!!




2. You have just been hired by the Dima Accounting Firn. You are sitting in the lunch room and two senior partners sit down at the same table as you. You listen to their conversation. State whether you agree or disagree with each of the statements made by the senior auditors and explain why: a. Control risk refers to both the design of controls and the implementation of controls. To assess control risk, the auditor must first assess the strength of the control and then test whether the control is being consistently followed by client staff If the system of internal control is very strong, it is impossible for a highly material error or fraudulent transaction to get through the system. Audit risk should vary inversely with Inherent and Control Risk. The lower IR and CR are assessed, the lower the risk of material misstatement so the auditor should assume lower Planned Detection Risk. Although auditors may assign numbers to the various risks (IR, CR, PDR, AAR), the numbers are really judgmental in nature. AAR is much higher with publicly traded companies because they have more regulations to follow (PCAOB rules in addition to FASB) and because the number of beneficiaries of the financial statements is much larger. b. c. d. e.

Explanation / Answer

a) I would agree with the statement that control risk refers to both the design and implementation of controls. To assess control risk auditor will have to study the segregation of duties to various personnel of the company, in particular, the duties regarding custody and record keeping. Auditors will also have to check the strength of the controls like the secure locations for the assets, tags on the furniture, backup procedures for emergencies. In the end, whether the control is being consistently followed by client staff or not.

b) I would not agree. No business is immune to fraud, though small and mid-sized organisations have higher susceptibility to occurence of a fraud. Larger organisations with strong internal controls also see frauds within the business. Employees discover loopholes within the systems with the passage of time and many a times, it is not an individual but a group with collective expertise, which involves into fraudulent activities for their individual benefit, hence, it is difficult to say that it is impossible for a highly material error or fraudulent transaction to get through an otherwise very strong system of internal control.

c) I will disagree that lower IR(Inherent risk) and CR(Control risk) should allow assumption of lower planned detection risk. Lower IR and CR would refelct upon the high efficiency of the internal controls placed by the organisation and is definitely a positive while auditing the financial statements of a firm but auditors cannot assume lower detection risk basis lower IR and CR. Substantive testing and analysis should be the basis for accuracy of financial statements, to ensure no material misstatement in the financial statements and low detection risk.

d) Agree, assessment is based on judgement of the auditors. Numbers may be assigned to various risks but they will always differ from person to person depending upon their way of thinking, experiences, educational background,etc, hence, numbers are judgemental.

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