CPA Exam — AUDAssessing Risk and Developing a Planned ResponseMedium
A client, a manufacturing company, has recently implemented a new enterprise resource planning (ERP) system that integrates all financial and operational data. The auditor notes that the implementation was rushed, and key personnel received minimal training. This situation is most likely to increase the auditor's assessment of:
- ADetection risk for revenue recognition.
- BInherent risk related to inventory valuation.
- CSampling risk for accounts receivable confirmations.
- DControl risk across multiple financial statement assertions.
Show answer & explanationAnswer & explanation
Correct answer: D. Control risk across multiple financial statement assertions.
A rushed ERP implementation with inadequate training compromises the effectiveness of internal controls embedded within the system and processes. This directly increases the risk that internal controls will fail to prevent or detect material misstatements across various financial statement assertions, leading to a higher control risk.
Why the other options are wrong
- A. Detection risk relates to the auditor's procedures; a weak control environment increases the risk of misstatement, which then influences the auditor's response, not directly detection risk itself.
- B. While inventory valuation might be affected, the issue is primarily with the breakdown of controls, not the inherent nature of inventory.
- C. Sampling risk is a statistical concept related to audit testing, not directly impacted by system implementation quality.
Control Risk & System Implementation
Control risk is the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity's internal control. Poor system implementation and inadequate training significantly elevate control risk.
- Weak controls increase likelihood of undetected misstatements.
- New systems require careful implementation and training.
- Control risk is assessed by the auditor.
Memory trick: Rushed systems mean 'control' goes out the window.