The engagement partner agreed with Sessions’s recommended approach. In planning the audit evidence for detailed inventory tests, the audit risk model was applied with the following results:
TDR = AAR/IR x CR x APR
TDR = test of details risk
AAR = acceptable audit risk
IR = inherent risk
CR = control risk
APR = analytical procedures risk
Therefore, using Sessions’s assessments and judgments as described previously,
TDR = .05/1.0 x .5 x.6
TDR = .17
a. Explain what .17 means in this audit.
b. Calculate TDR assuming that Sessions had assessed control risk at 100% and all other risks as they are stated.
c. Explain the effect of your answer in requirement b on the planned audit procedures and sample size in the audit of inventory compared with the .17 calculated by Sessions.