Suzie Allbright, CPA, is planning the audit of a newly obtained client, Phillips Energy, for the year ended December 31, 20xx. Phillips Energy is regulated by the state utility commission and because it is a publicly traded company, the audited financial statements must be filed with the Securities and Exchange Commission (SEC).
Phillips Energy is considerably more profitable than many of its competitors, largely due to its extensive investment in information technologies used in its energy distribution and other key business processes. Recent growth into rural markets, however, has placed some strain on 20xx operations. Additionally, Phillips Energy expanded its investments into speculative markets and is also making greater use of derivative and hedging transactions to mitigate some of its investment risks. Because of the complexities of the accounting associated with these activities, Phillips Energy added several highly educated and experienced accountants within its financial reporting team. The Internal Audit department, which has direct reporting responsibility to the Audit Committee, is also actively involved in reviewing key accounting assumptions and estimates on a quarterly basis.
Suzie Allbright’s discussion with the previous auditor revealed that the client has experienced some difficulty in correctly tracking existing property, plant, and equipment items. This largely involves equipment located at its various energy production facilities. During the recent year, Phillips acquired a rural electric company, which expanded the number of energy production facilities.
Allbright plans to staff the audit engagement with several members of the firm who have experience in auditing energy and public companies. Partner review of key accounts will be extensive.
Refer to the Course Schedule within the Syllabus for specific project deliverables and due dates.
You have two deliverables for this assignment:
Project 2 – Part 1: Definition of the Audit Risk Model
Answer the following questions to define the audit risk model and its components:
- Define the audit risk model.
- What is meant by control risk? What is the effect on the amount of evidence the auditor must gather and evaluate when control risk is decreased from high to low?
- What is meant by inherent risk? Identify four factors that make for high inherent risk in audits.
- What is meant by acceptable audit risk? What is its relevance to evidence accumulation?
- What is meant by planned detection risk? What is the effect on the amount of evidence the auditor must gather and evaluate when planned detection risk is increased from medium to high?
Project 2 – Part 2: Evaluation of the Case Study
Based on the information provided in the case study, create a chart that identifies the following:
- Minimum of ten risk factors
- Effect on the risk of material misstatement. Does the factor increase or decrease the risk?
- Audit risk model component. Identify the component of the model that applies to the factor selected. You will use one of the following:
- Inherent risk
- Acceptable audit risk
- Control risk
- Planned detection risk
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