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Solutions Manual

to accompany

Auditing: a practical approach 2nd edition

by

Jane Hamilton

CHAPTER 4

Risk Assessment II

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© John Wiley & Sons Australia, Ltd 2013

Chapter 4 – Risk Assessment II

REVIEW QUESTIONS

4.11 Explain the approach adopted by auditors of identifying accounts and related assertions at risk of material misstatement. How does this approach help reduce audit risk to an acceptably low level?

Audit risk is the risk that the auditor gives an inappropriate opinion on the financial report. The auditor tries to keep this risk to an acceptably low level by planning the audit according to the key risks faced by the client and allocating more audit time where the risk of material misstatement is highest. This means that the auditor tailors the audit work to the client’s characteristics. If the client has characteristics which suggest that the greater risk of material misstatement is in a particular account or transaction cycle, the auditor will plan to do more audit work on that account or transaction cycle than would be done for another client with different characteristics and lower risk in that area.

The auditor identifies the specific accounts that are most at risk, and how those accounts are likely to be misstated. For example, one client may have a greater risk that fictitious credit sales are included in the balance of accounts receivable, while another client may have a greater risk that accounts receivable balance includes balances that are not likely to be collected. The first client has ineffective controls over processing credit sales and the second client has ineffective controls over granting credit to customers. The auditor would spend more time gathering evidence over the validity of credit sales transactions for the first client, and more time gathering evidence about the collectability of accounts receivable for the second client.

4.12 How does the auditor’s preliminary...