Trade-offs in Audit Testing

1. What would your CR assessment be with respect to the existence assertion? Provide support for your answer.

Hint: To answer this question, calculate the total audit hours under each of the four CR assessment levels and choose the level that utilizes the fewest audit hours. (Assume hourly billing rates are the same for all tests of control and audit procedures.) Show your calculations.

2. How does the choice of a CR assessment affect audit quality?

3. Suppose you assessed CR as Low and your control testing indicated that the control activities were operating effectively. Later in the audit, when gathering substantive evidence by obtaining confirmations from customers, you discovered several misstatements in accounts receivable related to the existence assertion.

a)Speculate as to how it could happen that control testing indicates the controls are operating effectively, yet misstatements in the financial statements are detected by substantive tests of details.

b)What effect, if any, should this detection of misstatements have on your control risk assessment?

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