Jane Is a Sole Practitioner Operating Out of a Local

question 56

Essay

Jane is a sole practitioner operating out of a local office.She is part of a regional group of firms and occasionally does small audits with the assistance of one staff person.Using automated working paper software,she runs a standard set of analytical review calculations for each audit,then puts them in the working paper file.She does not look at the analytical review process again.
Since most of her audit clients have no internal controls,she then calculates materiality and conducts a substantive audit.She prefers to do more substantive testing rather than having to do all kinds of work with internal controls.
Required:
What is wrong with Jane's audit approach?

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Definitions:

Fixed Costs

Costs that do not vary with production level, such as rent, insurance, and salaries of administrative staff.

Variable Costs

Expenses that change directly and proportionally with the level of production or sales volume, such as raw materials and direct labor.

Break-Even Point

The level of sales at which total revenues equal total costs, resulting in zero profit.

Fixed Costs

Costs that do not vary with the level of output or sales, such as rent, salaries, and insurance premiums.