Comptronix Case Solution

Question 1

Audit risk refers to the possibility that the auditors may unknowingly fail to appropriately modify their opinions on financial statements that are materially misstated (137). It is the risk that auditors will issue an unqualified opinion on financial statements that contain a material departure from GAAP.

The audit risk model contains four components known as inherent risk, control risk, detection risk, and finally audit risk. The risk of material misstatements may be separated into two components known as inherent risk and control risk.

* Inherent risk represents the possibility of material misstatement of an assertion before considering the client’s internal control. Factors such as inconsistent profitability, going concern problems, questionable reputation, etc. are all representations of inherent risk (139).

* Control risk is the risk that a material misstatement could occur in a relevant assertion and not be prevented or detected on a timely basis by the client’s internal control (140). Relevant assertions are those that, without regard to the effect of controls, have a reasonably possibility of containing a misstatement that could cause the financial statements to be misstated (138).

* On the other hand, detection risk represents a risk that the auditors will not detect such misstatement. It is the risk that auditors will fail to detect a material misstatement that exist in a relevant assertion. Detection risk results because auditor's substantive procedures are not 100% effective.

* The risk that that internal control bypasses misstatements and the auditors fail to detect from audit procedures is the ultimate audit risk.

Auditing standards require the auditors to obtain sufficient appropriate audit evidence to support their audit opinion.

a. Sufficiency is the measure of the quantity of the evidence.

b. Appropriateness of evidence relates to its relevance and its reliability...