The auditors of Smith Electronics wish to limit the audit risk of material misstatement in the test of accounts receivable to 5 percent.They believe that inherent risk is 100%,and there is a 40% risk that material misstatement could have bypassed the client's system of internal control.What is the maximum detection risk the auditors should specify in their substantive procedures of details of accounts receivable?
A)5%.
B)12.5%.
C)42.7%.
D)60%.

Question

Quizplus · Accepted Answer

Detection risk = Audit Risk / (Inherent Risk x Control Risk). Given Audit Risk = 5%, Inherent Risk = 100% (or 1), and Control Risk = 40% (or 0.4), the calculation is 5% / (1 x 0.4) = 12.5%.

The Auditors of Smith Electronics Wish to Limit the Audit