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Audit Risk and Financial Adjustments Guide

The document outlines various homework problems related to inherent risk, control risk, and detection risk in auditing, providing specific answers and explanations. It includes adjustments for financial statements, such as write-offs for subscription costs, warranty expenses, and inventory write-downs. Additionally, it discusses the implications of inherent and control risks in audit practices and management estimates for inventory values.

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28 views2 pages

Audit Risk and Financial Adjustments Guide

The document outlines various homework problems related to inherent risk, control risk, and detection risk in auditing, providing specific answers and explanations. It includes adjustments for financial statements, such as write-offs for subscription costs, warranty expenses, and inventory write-downs. Additionally, it discusses the implications of inherent and control risks in audit practices and management estimates for inventory values.

Uploaded by

danielpint34
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Chapter 4 Homework – Daniel Pinto

4.28 – A. Inherent risk and control risk.

4.29 – D. Detection risk.

4.34 – D. All of the above.

4.35 – D. Accounts and relationships that can represent specific potential


problems and risks in the financial statements.

4.39 – A. Assess risk of material misstatement at high and achieve an


acceptably low audit risk by performing extensive substantive tests.

4.49 – B. The entity enters into significant derivative transactions as hedges.

4.54
1. Deferred Subscription Costs: Given the termination of subscription
services we should write off the full $12 Million instead of the $3 Million
2. No additional adjustment is needed for the Allowance for Doubtful
Accounts as management’s estimate matches the amount in doubt
3. Because of uncertainty we will use the expected value approach, using
the midpoint of the range we will increase the Warranty Expense to $4
Million
4. Salvage value: $1 million
Rebuild and sell:
a. Selling price: $8 million
b. Less: Marketing and shipping (20%): $1.6 million
c. Less: Normal profit (5%): $0.4 million
d. Less: Rebuild cost: $2 million
= Net realizable value: $4 million
Inventory write-down of $6 million ($10 million - $4 million).
5. Government contract write-down will be $1.5 Million the midpoint of
$1-2 Million
6. Adjusting Entry
Debit Credit
Loss on Subscription Services $12
Millio
n
Warranty Expense $4
Millio
n
Inventory Write-down $6
Millio
n
Loss on Government Contract $1.5
Millio
n
Deferred Subscription $12
Costs Millio
n
Allowance for Warranty $4
Expenses Millio
n
Allowance for Inventory $6
Obsolescence Millio
n
Liability for Gov't $1.5
Contract Refund Millio
n

4.59
1. Paul’s is incorrect, Inherent risk is never zero even with a history of no
adjustments. Factors like industry complexity and business nature
always contribute to some level of inherent risk
2. Hill’s belief is inappropriate. Control risk can’t be zero, despite strong
internal controls. Possibilities of human error always will exist.
3. Fields’ approach is completely wrong, Ignoring inherent risk and limited
control review violates the Audit risk model, this will increase overall
audit risk.
4. Shad’s approach is very concerning, The situation shows a high
increase in inherent and control risks due to staff turnover and
disorganization. Reducing audit times with these circumstances is
wrong and increases detection risk.

4.60 (ASC 330)


 Management’s estimate of $99,000
o The estimate of the market value at $99,000 resulted in a
recognized loss of $21,000. To figure out if an adjustment is
needed, we will use the net realizable value. After calculation the
net realizable value is a range of $71,000-$87,000
Debit: Loss on Inventory Write-down $33,000
Credit: Inventory $33,000

 Managements estimate of $80,000


o Since this estimate fall within the acceptable range no
adjustment would be required

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