<p> Accounting 408</p><p>Problem 4-1</p><p>Shown below are seven situations in which the auditor wishes to use the audit risk model to determine planned acceptable levels of detection risk and the planned levels of evidence needed for specific financial statement assertions. The auditor has used judgment in arriving at the quantitative expressions for audit, inherent, and control risk.</p><p>Situation A B C D E F G</p><p>Desired audit 1% 1% 5% 5% 5% 5% 10% risk</p><p>Assessed inherent 20% 50% 20% 50% 20% 50% 50% risk</p><p>Planned assessed 50% 50% 50% 40% 20% 25% 20% level of control risk</p><p>Planned detection risk</p><p>Planned evidence</p><p>Required: a. Using the audit risk model, calculate the planned detection risk for each of the situations above. b. Rank the seven situations from most evidence required (1) to least evidence required (7). c. What do the results obtained for situations (E) and (G) mean with respect to procedures to obtain evidence to achieve planned detection risk? d. State how your answers to part (a) would be affected by a change in only one of the following factors while the other two factors are held constant at the levels indicated in the table: 1. Increase in desired audit risk. 2. Decrease in assessed inherent risk. 3. Increase in planned assessed level of control risk. Problem 4-2</p><p>Following are ten pairs of assertions:</p><p>1. a. Existence or occurrence of inventory. b. Existence or occurrence of building.</p><p>2. a. Valuation or allocation of cash. b. Valuation or allocation of deferred income taxes.</p><p>3. a. Existence or occurrence of accounts payable. b. Completeness of accounts payable.</p><p>4. a. Rights and obligations of accrued wages payable. b. Rights and obligations of liability under warranties.</p><p>5. a. Presentation and disclosure of repairs and maintenance expense. b. Presentation and disclosure of telephone expense.</p><p>6. a. Valuation or allocation of long-term investments. b. Valuation or allocation of land.</p><p>7. a. Existence or occurrence of accounts receivable. b. Completeness of accounts receivable.</p><p>8. a. Existence or occurrence of cash. b. Valuation or allocation of cash.</p><p>9. a. Valuation or allocation of bad debts expense. b. Valuation or allocation of depreciation expense.</p><p>10. a. Valuation or allocation of receivable due from affiliate. b. Valuation or allocation of note payable to bank.</p><p>Required: For each pair of assertions, indicate whether (a) or (b) would typically have the higher inherent risk and state why. Problem 4-3</p><p>Shown below are four situations in which the auditor wishes to determine planned acceptable levels of detection risk and the planned levels of evidence needed for specific financial statement assertions. The auditor has used judgment in arriving at the nonquantitative expressions for audit, inherent, and control risk.</p><p>Situation A B C D</p><p>Desired audit Low Low Low Low risk</p><p>Assessed inherent Moderate High Low Low risk</p><p>Planned assessed level Low Maximum High Low of control risk</p><p>Planned detection risk</p><p>Planned evidence</p><p>Required: a. Using the risk components matrix shown below, determine the acceptable level of detection risk for each situation. b. Rank the four situations from most evidence required (1) to least evidence required (4). Explain your ranking of Situation D.</p><p>Risk Components Matrix (from AICPA Audit Guide) Control Risk Assessment Inherent Risk Maximum High Moderate Low Assessment Acceptable Level of Detection Risk to Achieve Low Audit Risk Maximum Very Low Very Low Low Low High Very Low Low Low Moderate Moderate Low Low Moderate High Low Low Moderate High *</p><p>* Substantive tests may not be necessary for a particular assertion.</p>