q1 What do you think is the benefit of a financial statement

q1

What do you think is the benefit of a financial statement audit to each of the following groups. Write a maximum of two sentences to answer for each group of people (maximum of 8 sentences total).

The firm being audited

Investors in the firm being audited

Society in general

The audit firm

q2

You have a publicly traded audit client with the following characteristics:

$100,000,000 in net income before taxes

10,000,000 shares of stock outstanding

Analyst expectations of $8.00 earnings per share

A loan covenant that requires earnings per share of $9.00 per share. The loan must be repaid immediately if earning per share fall below $9.

Your firm’s policy is to set materiality at between 3 and 7 % of income before taxes, subject to your professional judgment. What materiality amount would you set in this case and why?

q3

An auditor believes that controls can not be relied upon and sets control risk to maximum. Compared to setting control risk low, what is the effect on

Audit risk

Inherent risk

Detection risk

The extend of substantive testing?

Solution

As per policy, only 1 question is allowed to answer at a time, so answering Q1 :

Q1 : The benefits of the auditing of the financial statements for :

1) The firm being audited : The firm is a legal identity who has legal saying and have liability to the shareholders, society and investor / analyst in general, so to prove the authenticity of the results, the audit is essential. The firm also become satisfied that there is no bug in the financial statements reported by them.

2) Investors in the firm being audited : The audit makes the financial statements authentic and genuine for the investors of the firm.

3) Society in general : The society in general will find the financial statements authentic and can judge the development of the society on the basis of the growth of the company. The general public can have assessment between the two competitors and judge where to invest in .

4) the Audit Firm : The audit firm who is doing the audit would find it a encouraging point to authenticate a company’s financial statements. A genuine work done by the audit firm will be praised and more work contracts are achieved by them.

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