Question

One of your clients recently upgraded its accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system. This installation took place over the last nine months of the entity's fiscal year and is nearly 100% complete by the balance sheet date. Which of the following best describes the main affect of this event on the audit risk model for the current year?

A) It will likely increase the risk of material misstatement.
B) It will likely decrease the risk of material misstatement.
C) It will likely decrease the audit risk.
D) It will likely increase the detection risk.

Answer 1

Upgrading the accounting system to a complex ERP system during the fiscal year is likely to increase the risk of material misstatement in the audit risk model.

Step-by-step explanation:

The main affect of upgrading the accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system during the last nine months of an entity's fiscal year is that it will likely increase the risk of material misstatement in the audit risk model for the current year.

This is because the implementation of a new system can introduce new processes, controls, and potential errors that may lead to incorrect financial statements. The transition period and the complexity of the new system also increase the risk of errors or omissions.

Therefore, auditors need to carefully assess and test the new system's controls, ensure that it has been correctly implemented, and perform additional procedures to mitigate the risk of material misstatement.