Required: For each scenario, determine the appropriate impact on audit risk. A s
ID: 2585314 • Letter: R
Question
Required: For each scenario, determine the appropriate impact on audit risk. A selection may be used once, more than once, or not at all.
Impact
Increase inherent risk
Decrease inherent risk
Increase control risk
Decrease control risk
Increase detection risk
Decrease detection risk
Required: For each scenario, determine the appropriate impact on audit risk. A selection may be used once, more than once, or not at all.
Impact
Increase inherent risk
Decrease inherent risk
Increase control risk
Decrease control risk
Increase detection risk
Decrease detection risk
Related Account Scenario 1. Accounts Receivable During Year 3, Rock Chalk Corp implemented a new control whereby an independent person reconciles the receivables general ledger and the accounts receivable subsidiary ledger monthly. 2. Prepaids Mark decides to test prepaids before year-end. 3. Accounts Payable Mark noted that the control related to matching invoices, purchases orders, and receiving reports was not being performed by the accounting clerk. 4. Sales In Year 3, in accordance with the GAAP effective date, new accounting pronouncements related to revenue were implemented.Explanation / Answer
ACCOUNT RECEIVABLE:
All the risks - inherent comtrol risk, detection risk and control risk are decreased because the entire reconcilliation is being carried out by an independent third party. Mark has no interference in the functioning of the third party and the auditor can very well rely upon his work.
PREPAIDS
The prepaids are tested by Mark himself. Hence, inherent risk is decreased but detection risk in control risk remain the same.
ACCOUNT PAYABLES;
When Mark himself has identified that the accounting clerk has not done his work properly, all the risks - inherent, control and detection - are increased because there is rather no internal control over accounts payble.
SALES
When new norms as per GAAP effecttive date are implemented, obviously the risk of control and detection are decreased but inherent risk - relating to accurate and correct implementation of the GAAP pronouncement remain unchanged
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