申論題

四、The following 4 situations (A-D) are independent.
A. Paul, CPA, has participated in the audit of A Company for five years, first as an assistant accountant
and last two years as the senior accounts. Paul has never seen an accounting adjustment
recommendation and believes the inherent risk must be zero.
B. Hill CPA, has just (November 30) completed an exhaustive study and evaluation of the internal
controls of B Company (fiscal year ending December 31). Hill believes the control risk must be zero
because no material errors could possibly slip through the many error-checking procedures and
review layers that B Company used.
C. Philly, CPA, is lazy and does not like audit jobs. On the audit of C Company, Philly decided to use
substantive procedures to audit the year-end balances very thoroughly to the extent that the risk of
failing to detect material errors and irregularities should be 0.02 or less. Philly gave no thought to
inherent risk and conducted only a very limited review of C Company’s internal control system.
D. Alice, CPA, is nearing the end of a “dirty” audit of D Company. All of D Company’s accounting
personnel resigned during the year and were replaced by inexperienced people. The comptroller
resigned last month in disgust. The journals and ledgers were a mess because the one computer
specialist was hospitalized for three months during the year. “Thankfully,” Alice thought, “I’ve been
able to do this audit in less time than last year when everything was operating smoothly’.
Required:

1. List the audit risk model.