Which of the following is an incorrect statement? a If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risk. b The greater the inherent and control risk the auditor believes exist the less detection risk that can be accepted. c The auditor might make separate or combined assessments of inherent risk and control risk. d Detection risk cannot be changed at the auditor’s discretion.

Answer:

d Detection risk cannot be changed at the auditor’s discretion.

Explanation:

Audit risk can be defined as the risk that financial reports issued by an auditor are materially incorrect due to fraud or errors, despite the fact that the inappropriate audit opinion states that the financial reports are void of any material misstatements. There are two (2) main components of an audit risk, these are;

1. Detection risk: this deals with the fact that procedures used by the auditor will not detect any material misstatement as a result of errors.

2. Risk of material misstatement: this deals with the material misstatements of financial statements before auditing. There are two main types namely, inherent and control risks.

The following statements are true and correct;

A. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risk.

B.The greater the inherent and control risk the auditor believes exist the less detection risk that can be accepted.

C. The auditor might make separate or combined assessments of inherent risk and control risk.

However, saying that detection risk cannot be changed at the auditor’s discretion is false. Since it is arises as a result of error, if the auditor conducts a proper sampling procedure it can be detected and eventually changed.

7. A fast-food chain plans to expand by opening several new restaurants. The chain operates two types of
restaurants, drive-through and full-service. A drive-through restaurant costs RM 100.000 to construct,
requires 5 employees, and has an expected annual revenue of RM 200.000. A full service restaurant
costs RM 150.000 to construct, requires 15 employees, and has an expected annual revenue of RM
500,000. The chain has RM 2,400,000 in capital available for expansion. Labor contracts require that
they hire no more than 210 employees, and licensing restrictions require that they open no more than
20 new restaurants.
(a) How many restaurants of each type should the chain open in order to maximize the expected
revenue? [1 point)
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