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Reminder – I do not allow direct quotes in student’s work in this class. You need to paraphrase and cite your outside sources. Outside sources do not include the text and so you don’t need to cite it.
1) State whether you believe each of the following are true or false statements about acceptable audit risk (AAR) and why.
Hint: The purpose of this question is to explore the definition of AAR and what factors affect where an audit firm would set AAR on a given audit. Keep in mind that AAR is the risk going into the audit that the auditor is willing to accept that the audited financial statements still contain a material misstatement and not the risk that they actually do after the audit is finished. That is it is a planning tool and not a measure of the actual final risk that the financial statements are misstated after the audit has been completed.
a) A CPA firm should attempt to achieve the same level of AAR for all audit clients when the client’s circumstances are similar.
b) A CPA firm should decrease AAR for audit clients when external users rely heavily on the statements.
c) A CPA firm should decrease AAR for audit clients where engagement risk is high.
d) Different CPA firms should attempt to achieve reasonable similar audit risks for clients with similar circumstances.
2) For each of the following items mentioned in the text in the section on Understanding the Auditee discuss an example of information about each category might affect auditing planning by linking your example to changes in acceptable audit risk or inherent risk.
a) Industrial and external environment
b) Business operations and processes
c) Management and governance
d) Objectives and strategies
e) Performance measures