Explain the Circumstances When the Auditor Should Revise the Components of the Audit Risk Model and the Effect of the Revisions on Planned Detection Risk and Planned Evidence

9-21 (Objective 9-10) Explain the circumstances when the auditor should revise the components of the audit risk model and the effect of the revisions on planned detection risk and planned evidence.

The assessments of acceptable audit risk, inherent risk, and control risk and planned detection risk are highly subjective and are only approximations of reality. The auditor should revise the components of the audit risk model when the evidence accumulated during the audit indicates that the auditor's original assessment of acceptable audit risk is too low or too high. Most auditors are more concerned about under-auditing which exposes the CPA firm to legal liability and loss of professional reputation.

When the auditors that original assessment was understated or overstated, the auditor must revise the original assessment. The auditor should consider the effect of the revision on evidence requirements without use of the audit risk model.

9-22 (Objectives 9-1, 9-2) The following questions deal with materiality. Choose the best response.

a. Which one of the following statements is correct concerning the concept of materiality?

(1) Materiality is determined by reference to guidelines established by the AICPA.

(2) Materiality depends only on the dollar amount of an item relative to other items in the financial statements.

(3) Materiality depends on the nature of an item rather than the dollar amount.

(4) Materiality is a matter of professional judgment.

b. The concept of materiality will be least important to the CPA in determining the

(1) scope of the audit of specific accounts.

(2) specific transactions that should be reviewed.

(3) effects of audit exceptions upon the opinion.

(4) effects of the CPA's direct financial interest in a client upon the CPA's independence.

c. In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity's income statement, but that misstatements will have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate

(1) $10,000

(2) $15,000

(3) $20,000

(4) $30,000

9-23 (Objective 9-1, 9-6 , 9-8) The following questions concern materiality and risk. Choose the best response.

a. Edison