Once the auditor has a solid understanding of the company’s revenue and collection cycle, the auditor can identify (a) significant accounts and (b) relevant assertions. The auditor should first identify the significant accounts. An account is significant if there is a reasonable chance it could contain a material misstatement. The auditor can use the audit risk model to identify significant accounts, as follows: • Set audit risk at a level (e.g., low) with which the auditor is comfortable • Assess the risk of material misstatement (both inherent risk and control risk) • Set detection risk at the appropriate level for the account Certain accounts will be at a higher risk of material misstatement, so the auditor needs to focus the most attention on those accounts (thereby decreasing detection risk for those accounts). Note that there is always presumed to be a fraud risk for revenue recognition, so sales revenue will …
