9-35 (objectives 9-5, 9-7, 9-8) Mark Hopper is planning the audit of the investments account for audit

client
Garden Supply Co. (GSC). GSC invests excess cash at the end of the summer sales season through an
investment manager who invests in equity and debt securities for GSCs account. Hopper has assessed the
following risks as low, medium, or high for the relevant balance-related audit objectives in the investment
account.

Risk of Material
Misstatements

Balance-Related Audit Acceptable Audit Planned Detection

Objectives Risk Inherent Risk Control Risk Risk

Existence Medium Medium Medium

Completeness Medium Low Medium

Accuracy Low High Medium

Classification Medium Low Low

Cutoff Medium Medium Low

Detail tie-in Low Medium Low

Realizable value Low High Medium

Rights and obligations Medium Medium Low

Required

1. Describe each of the four identified risks in the columns of the table above.

2. Fill in the blank for planned detection risk for each balance-related audit objective using the terms
low, medium, or high.

3. Which audit objectives require the greatest amount of evidence and which require the least?

4. Through audit testing, Hopper finds the investment managers controls over recording purchases and
sales of securities are not as effective as originally assessed. What should Hopper do?
*Based on AICPA question paper, American Institute of Certified Public Accountants.

9-36 (objective 9-5) Below are ten independent risk factors:

1. The client lacks sufficient working capital to continue operations.

2. The client fails to detect employee theft of inventory from the warehouse because there are no
restrictions on warehouse access and the client does not reconcile inventory on hand to recorded
amounts on a timely basis.

3. The company is publicly traded.

4. The auditor has identified numerous material misstatements during prior year audit engagements.

5. The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an
account balance when examining audit evidence accumulated.

6. The client is one of the industrys largest based on its size and market share.

7. The client engages in several material transactions with entities owned by family members of several
of the clients senior executives.

8. The allowance for doubtful accounts is based on significant assumptions made by management.

9. The audit program omits several necessary audit procedures.

10. The client fails to reconcile bank accounts to recorded cash balances.

Required

Identify which of the following audit risk model components relates most directly to each of the ten risk
factors:

Acceptable audit risk

Control risk

Inherent risk

Planned detection risk

(Arens 290-291)

Arens, Alvin A., Randal Elder, Mark Beasley, Chris Hogan. Auditing and Assurance Services, 16th Edition.
Pearson Learning Solutions, 10/2016.

FACTOR EFFECT ON THE RISK OF MATERIAL MISSTATEMENT. AUDIT

RISK MODEL COMPONENT
1. Henderson is a new client. Increases
Inherent Risk

Risk factor RMM Inherent Risk

6. The client is one of the industrys largest based on its size Increas Planned detection
and market share es risk

(Arens 291)
Arens, Alvin A., Randal Elder, Mark Beasley, Chris Hogan. Auditing and Assurance Services,
16th Edition. Pearson Learning Solutions, 10/2016.

Dear Class,

The Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) in 1992
was revolutionary: it represented the first major attempt to define internal control over financial reporting and
provide a standard for measurement. Visit the COSO website found at www.COSO.org , click on the Guidance
tab, and download a pfd. file of the Executive Summary from the Internal Control Integrated Framework
(2013) link. Read how the 2013 COSO Framework is expected to help organizations design and implement
effective internal control policies in light of many changes in business and operating environments.

In 2002, the passage of the Sarbanes-Oxley Act (SOX)-specifically, section 404 of the act-further highlighted the
importance of internal control. Visit the SOX-Online website found atwww.sox-online.com and click on the

Sarbanes-Oxley Act of 2002 (H.R. 3763) link to access the SOX Table of Contents at http://sox-
online.com/act_toc.html . Read Title IV--Enhanced Financial Disclosures: Sec. 404. Management assessment of
internal controls. You can also find a pdf. file of the SOX Law of 2002
at https://www.sec.gov/about/laws/soa2002.pdf .

The PCAOB continued this focus on internal controls and, specifically, on the COSO framework in 2004, when it
issued Auditing Standards (AS) 2, An Audit of Internal Control over Financial Reporting performed in conjunction
with an audit if financial statements, and explicitly referenced the COSO framework as an appropriate framework
to use when evaluating internal controls. In 2007, the PCAOB issued AS 5, an Audit of Internal Control over
Financial Reporting that is integrating with an Audit of Financial Statements to supersede AS 2. Read PCAOBs
Auditing Standard (AU) 5, an Audit of Internal Control over Financial Reporting that is integrating with an Audit
of Financial Statements found at http://pcaobus.org/standards/auditing/pages/auditing_standard_5.aspx

Visit the SEC website [http://www.sec.gov] and answer the following questions.

1. Use EDGAR to search for Tri-Valley Corporation (TVC) and Monarch Staffing Inc. Find TVCs 10-K and
Monarchs 10-KSB for the year ended 12-31-06.

These companies are publicly traded and as such are found on the SECs website. The use of EDGAR full-
text search option helps to identify these companies fillings more efficiently.

2. Did either company report material weaknesses in ICFR? If so, what were the weaknesses?

Both companies report material weakness in ICFR for the year ended 12-31-06. TVC
reported deficiencies related to controls over the accounting for complex transactions
to ensure such transactions are recorded as necessary to permit preparation of
financial statements and disclosures in accordance with generally accepted accounting
principles. Such transactions include:
+ or Proved and unproved properties
+ or - loans guaranteed with restricted common stock
+ or Deferred income taxes
+ or - Discontinued operations from the sale of interest in Tri-Western Resources, and
+ or - Share-based payments arrangements
Monarch Staffing reported deficiencies as follows:
We did not maintain a sufficient complement of personnel with an appropriate level of
accounting knowledge, experience, and training in the application of U.S. generally
accepted accounting principles commensurate with our existing financial reporting
requirements and the requirements we face as a public company. Accordingly,
management has concluded that this control deficiency constitutes a material
weakness, and that it contributed to the following material weakness.
We did not maintain effective controls with respect to reviewing and authorizing related
party transactions. Specifically, our control procedures did not prevent the Company
from making payments on behalf of other related parties. Accordingly, measurement
has concluded that this control deficiency constitutes a material weakness.
http://wps.pearsoned.co.uk/ema_ge_arens_audit_13/139/35767/9156591.cw/-/9156617/
index.html