In Practice, Auditors Rarely Assign Numerical Probabilities to Inherent Risk

question 8

Essay

In practice, auditors rarely assign numerical probabilities to inherent risk, control risk or acceptable audit risk. It is more common to assess these risks as high, medium or low. For each of the four situations below, fill in the blanks for planned detection risk and the amount of evidence you would plan to gather ('planned evidence') using the terms high, medium or low.

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Definitions:

Common Stock

A type of security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits through dividends.

Partnership

A Partnership is a legal form of business operation between two or more individuals who share management and profits.

Capital Accounts

Accounts on a company's balance sheet that represent the cumulative amount of equity invested by shareholders and retained earnings.

Net Income

The profit of a company after all expenses and taxes have been deducted from total revenue.