Audit Risk Model- Example 1
You are assigned to conduct the audit procedures for theinventory account at Tech Toys, a public company in the technologyindustry that sells the latest technology for fitness watches.Inventory obsolescence and the product’s susceptibility to theft isa business risk that management has identified for itsinventory. As part of your procedures you have toevaluate the overall risk assessment for the inventory accountusing the audit risk model. Your team has decided thatthe acceptable level of overall audit risk for this account is VeryLow or Low.
You perform a walkthrough of Tech Toys’ process for itsinventory, which includes internal controls surrounding theexistence, completeness, and valuation ofinventory. Based on your walkthrough and test of controlprocedures, you find that Tech Toys has inadequate internalcontrols in place surrounding its inventory processes.
Given the above, what is the assigned level of risk (low,moderate, or high) for each of the components of the audit riskmodel that will enable a Very Low or Low level of audit risk forthe inventory account? Briefly describe your judgment regarding thelevel of risk for each component. What does yourassessment for each of the components of the Audit Risk Modelindicate about the nature, timing, and extent of substantiveprocedures that will be performed?
Audit Risk Model- Example 2
Assume instead that based on your walkthrough and test ofcontrol procedures, you find that Tech Toys has adequate internalcontrols in place surrounding its inventoryprocesses. How does this change your assessment?
