Audit Risk And Materiality

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ACCT 310 Auditing Audit Assignment 2 Audit Risk and Materiality (Submission: By 11 April 2012, Wednesday) Messier’s Chapter 3: Question 3-16 (30%) Question 3-19 (70%) Question 3-16 Assume that you are the new audit senior on the LV Drug Corporation (LVD) engagement. LVD is a pharmaceutical company that has three successful drugs and a number of drugs in progress in its research and development pipeline. You are considering detection risk at the financial statement level and it is important to identify the inherent risks and control risks that LVD has and how they relate to audit risk. Required: For each of the following factors, indicate whether it is an inherent risk or a control risk factor, and its effect on detection risk. In answering this question, assume that each factor is independent of the others. a. LVD is a publicly traded company. b. Dr. Jones is the major shareholder of LVD and its CEO. c. Dr. Jones has unusual influence over the board of directors. d. Your firm has audited LVD for the last four years. e. There has been high turnover of key accounting personnel during the last two years. f. The internal audit function reports to the audit committee. g. LVD signed an exclusive distribution contract with another pharmaceutical company to distribute its latest blockbuster drug---Xarmdon. h. During the current year, LVD began leasing a manufacturing facility that is owned by Forge Limited Partners. Dr. Jones is a partner in Forge. i. LVD has been the subject of lawsuits by users of Framadon, who claim that the drug affects their liver function. LVD is confident that there are no side effects from the use of Framadon. j. The Medical Control Agency has begun an investigation into LVD’s compliance procedures over its drug testing on human subjects. Question 3-19 Management fraud (e.g. fraudulent financial reporting) is a

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