SU 8: Responses to Assessed Risk

Question 1

1.) Increase/Decrease RMM or No Effect This was the first year TWD operated at a profit since Year 2 because the municipalities received increased fed and state funding for environmental purposes.

Answer 1

a. Decrease RMM, continued losses indicate an increase in risk. However, a turnaround into a profitable organization will likely decrease the RMM in the f/s for the auditor

Question 2

2.) Increase/Decrease RMM or No Effect TWD BOD is controlled by Mead, the majority shareholder, who also acts as CEO

Answer 2

a. Increase RMM, one set of opportunity risk factors for misstatements arising from fraudulent reporting involves ineffective monitoring of management. One such risk factor is domination of management by a single person or small group (in a non-owner managed business) without compensation controls. A compensating control in that circumstance is effective oversight by the board or audit committee of the financial reporting process and internal control.

Question 3

3.) Increase/Decrease RMM or No Effect The internal auditor reports to controller, and the controller reports to Mead

Answer 3

a. Increase RMM, ideally, internal auditor should report to the audit committee of the BOD. If internal auditor reports to management, the RMM is increased.

Question 4

4.) Increase/Decrease RMM or No Effect The accounting department has experienced a high rate of turnover of key personnel

Answer 4

a. Increase RMM, when management turnover is high, particularly of senior accounting personnel, the RMM is increased

Question 5

5.) TWB bank has a loan officer who meets regularly with TWD’s CEO and controller to monitor TWD financial performance

Answer 5

a. Decrease RMM, oversight by external parties, for example, a bank loan officer, provides some assurance to the auditor and decreases RMM

Question 6

6.) Increase/Decrease RMM or No Effect TWD employees are paid on biweekly basis

Answer 6

a. No effect, paying employees biweekly likely has little effect on RMM

Question 7

7.) Increase/Decrease RMM or No Effect CPA has audited TWD for 5 years

Answer 7

a. Decrease RMM, a continuing engagement in which the auditor has had experience with management is likely to be less risky than a first time audit

Question 8

8.) Increase/Decrease RMM or No Effect During Yr 6, TWD litigation filed against TWD was dropped by state. Loss contingency disclosures TWD included in f/s are being removed Yr 6.

Answer 8

a. Decrease RMM, the settlement of lawsuits filed against the client likely decreases the risk that the f/s are misstated.

Question 9

9.) During December Yr 6, TWD signed contract to lease equipment from an entity owned by Mead’s parents. Related party transaction was not disclosed in Yr 6 f/s

Answer 9

a. Increase RMM, a set of opportunity risk factors for material misstatements arising from fraudulent financial reporting involves the nature of the industry or the entity’s operation. One such risk factor is the existence of significant related-party transactions no in the ordinary course of business or with entities not audited or audited by another firm.

Question 10

10.) Increase/Decrease RMM or No Effect During December Yr 6, TWD increased casualty insurance coverage on several pieces of equipment from historical cost to replacement cost

Answer 10

a. No effect, the change in insurance coverage for specific assets is not likely to change RMM.

Question 11

Significant Risks

Answer 11

risks that require special audit consideration

Question 12

Auditor Response to Risk - F/S Level

Answer 12

1. ) emphasis on professional skepticism
2. ) Increased supervision
3. ) Staff with greater experience
4. ) Greater unpredictability greater procedures

Question 13

Record count.

Answer 13

A record count is a batch total that compares the items inputted with those processed.

Question 14

Hash total. .

Answer 14

A hash total is the sum of a numeric field that has no meaning by itself. It can be used to test that authorized transactions are processed

Question 15

Error listing.

Answer 15

An error listing is documentation of those transactions that fail a test so that they can be corrected and reprocessed.

Question 16

Reasonableness test.

Answer 16

A reasonableness test determines whether amount fields appear to be within an acceptable range.

Question 17

Sequence check.

Answer 17

This test can be used to test for missing documents.

Question 18

Test Data Approach

Answer 18

Dummy transactions specifically designed to test control activities management has claimed to have incorporated into processing programs

Question 19

Advantage of Test Data

Answer 19

It directly tests controls

Question 20

Disadvantage of Test Data

Answer 20

Processing only at a moment in time.

Question 21

Parallel Simulation

Answer 21

A controlled program to reprocess sets of client transactions and compares audit-achieved results with those of the client

Question 22

Advantage of Parallel Sim

Answer 22

Transactions from throughout the period can be reprocessed.

Question 23

Disadvantage of Parallel Sim

Answer 23

Cost and timing Coordination

Question 24

Integrated Test Facility Method (ITF)

Answer 24

The auditor creates a dummy record within the actual system.

Question 25

Advantage of ITF

Answer 25

Method that it actually tests the program in operation

Question 26

Disadvantage ITF

Answer 26

Requires considerable coordination, and dummy records must be purged prior to internal and external reporting

Question 27

Embedded audit module

Answer 27

Application system that is designed to identify and report actual transactions and other information that meet criteria that have audit significance

Question 28

Advantage of Embedded audit

Answer 28

Allows real-time online monitoring of user systems

Question 29

Disadvantage of Embedded Audit

Answer 29

Audit hooks must be programmed into the op systems and application programs to permit uses of audit modules