Liabilities and Stockholders' Equity March 30, 2009 March 31, 2008

Current liabilities
Notes payable $ 280,238 $ 113,411
Current portion of long-term debt 64,594 12,336
Accounts and drafts payable 359,511 380,395
Accrued salaries, wages, and vacations 112,200 63,557
Accrued income taxes 76,479 89,151
Other accrued liabilities 321,871 269,672
Current liabilities 1,214,893 928,522
Long-term debt 730,987 390,687
Other noncurrent liabilities 146,687 80,586
Deferred income taxes 142,344 119,715
Stockholders' equity
Common stock issued, 51,017,755 shares
in 2009 and 50,992,410 in 2008 51,018 50,992
Additional paid-in capital 149,177 148,584
Cumulative foreign currency translation
adjustment (76,572)
Retained earnings 1,554,170 1,462,723
Common stock held in treasury, at cost,
1,566,598 shares (51,967) (51,967)
Stockholders' equity 1,625,826 1,610,332
Total $3,860,737 $3,129,842

(2) For 0), explain the effect of planned detection risk on evidence accumulation
compared with its effect if planned detection risk were smaller.
c. Assume that the auditor is doing the fifth-year municipal audit of Redwood City,
Missouri, and concludes that acceptable audit risk can be set high and inherent and
control risks should be set low.
0) What circumstances will result in these conclusions?
(2) For the audit of repairs and maintenance, inherent and control risk are set at 20%
each. Acceptable audit risk is 5%. Calculate planned detection risk.
(3) How much evidence should be accumulated in this situation?
9-28 (Objectives 9-2,9-3,9-4) You are evaluating audit results for assets in the audit of
Roberts Manufacturing. You set the preliminary judgment about materiality at $50,000.
The account balances, tolerable misstatement, and estimated overstatements in the accounts
are shown next.
Account Tolerable Estimate of Total
Account Balance Misstatement Overstatements
Cash $ 50,000 $ 5,000 $ 1,000
Accounts receivable 1,200,000 30,000 20,000
Inventory 2,500,000 50,000 ?
Other assets 250,000 15,000 12,000
Total $4,000,000 $100,000 ?

Required a. Assume you tested inventory amounts totaling $1,000,000 and found $10,000 in
overstatements. Ignoring sampling risk, what is your estimate of the total misstate-
ment in inventory?
b. Based on the audit of the assets accounts and ignoring other accounts, are the overall
financial statements acceptable? Explain.
c. What do you believe the auditor should do in the circumstances?

280 PART TWO / THE AUDIT PROCESS

9· 29 (Objectives 9·6. 9· 7) Describe what is meant by acceptable audit risk. Explain why
each of the following statements is true:
a. A CPA firm should attempt to achieve the same audit risk for all audit clients when
circumstances are similar.
b. A CPA firm should decrease acceptable audit risk for audit clients when external users
rely heavily on the statements.
c. A CPA firm should decrease acceptable audit risk fo r audit clients when there is a
reasonably high likelihood of a cl ient filin g bankruptcy.
d. Different CPA firms should attempt to achieve reasonably si milar audit risks fo r
clients with si milar circumstances.
9-30 (Obj« tives 9·2. 9-3. 9-4. 9-6. 9-7. 9-8. 9- 10) The following are concepts discussed in
this chapter;
J. Preliminary judgment about materiality
2. Est imate of the combi ned misstatement
3. Acceptable audit risk
4. Tolerable misstatement
5. Inherent risk
6. Risk o f fraud
7. Esti mated tota l m isstatement in a segment
8. Control risk
9. Planned detection risk
10. Risk of material misstatement
a. Identify which items are audit planning decisions requiring professional judgment. Requi red
b. Identi fy which items are alldit concll/sions resulting from application of audit pro-
cedures and requiring professional judgment.
c. Under what circu mstances is it acceptable to change those items in part a after the
audit is started? Which items ca n be changed after the audit is 95% completed?
9-3 1 (Objectives 9-6. 9-9) Following are six situations that involve the audit risk model as it
is used for planning audit evidence requirements in the audit of inventory.
Situati on
Risk 1 2 3 4 5 6

Acceptable audit risk High High low low High Medium

Inherent risk low High High low Medium Medium
Control risk low low High High Medium Medium
Planned detection risk
Planned evidence

a. Explain what low, medium, and IJig/! mean for each of the four risks and planned Required
evidence.
b. Fill in the blanks for planned detect ion risk and planned evidence using the terms low,
medium, or high.
c. Usi ng your knowledge o f the relat io nships among the foregoing factors, state the
effect on planned evidence (increase or d«rease) of changin g each of the following
fi ve factors, while the other th ree remain constant:
( I) An increase in acceptable audit risk
(2) An increase in control risk
(3) An increase in planned detection risk
(4) An increase in inheren t risk
(5) An increase in inherent risk and a decrease in con trol risk of the same amount
9-32 (Objective 9-6) Following are six situations that involve the audit risk model as it is
used for planning audit evidence requirement s. Numbers are used only to help you
understand the relationsh ips among factors in the risk model.

CHAPTER 9 I MATERIAlITY AND RISK 281