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

The introduction of a new enterprise resource planning system increases the risk of material misstatement during an audit due to the complexities and potential errors associated with implementing the new system.

Step-by-step explanation:

The implementation of a new enterprise resource planning system into an organization's operations is a significant event that has implications for the company's audit risk model. During an audit, the audit risk model is used to determine the nature, timing, and extent of auditing procedures. The installation of complex systems such as an ERP system can greatly increase the risk of material misstatement because of the potential for errors during the transition period, complexities in the new system, and the possibility of insufficient understanding of the new processes by the users.

Therefore, the most accurate answer to the given question would be A) It will likely increase the risk of material misstatement. The increased risk does not translate to a decrease in audit risk; rather, it suggests that auditors may need to apply more rigorous procedures or additional checks to ensure a reasonable level of assurance that the financial statements are free from material misstatements. This risk is not typically related to detection risk, which pertains to auditors not catching the misstatements, so answer D would not be the primary effect of the ERP system's installation.