| Course | ACC 491 Contemporary Auditing I (ACC/491) |
|---|---|
| Week | 3 |
| Paper type | Audit planning, materiality and risk paper |
| Length | about 1,016 words, 4 double-spaced pages plus title page and references |
| Format | APA 7 student paper |
| School | University of Phoenix |
| Program | BS in Accounting |
| Updated | September 2026 |
Free sample paper for ACC 491 Week 3
Setting Materiality at $420,000 and Finding the Risky Accounts: Planning the Audit of a Composite Regional Home Builder With the Audit Risk Model
[Student Name]
University of Phoenix
ACC/491: Contemporary Auditing I
Week 3 Assignment
[Instructor Name]
[Date]
The builder, its audit team and all figures are composites written for a model paper; standards and research findings come from the sources listed.
A composite regional home builder builds about 260 homes a year in six communities, selling to first-time and move-up buyers. Its revenue last year was $118 million and pretax income about $8.4 million. A bank construction lender and a surety company that bonds its subdivision improvements both rely on its audited statements. The audit team is planning this year's engagement. Before an auditor tests a single transaction, two judgments decide how much testing will follow: how large an error must be to matter, and where errors are most likely to hide. This paper makes both judgments.
Setting Materiality
Materiality is the amount of misstatement that could reasonably influence users' decisions. The team uses pretax income as its benchmark because the lender and surety focus on profitability and the builder's ability to generate cash. Pretax income has been stable enough over three years, between $7.6 million and $8.9 million, to serve as a base. At 5% of the expected $8.4 million, overall materiality is $420,000.
Performance materiality is set at 70% of overall materiality, $294,000, to allow for misstatements the team does not detect and small uncorrected ones that add up. The team chose 70% rather than a higher percentage because this is its second year on the engagement and it found several adjustments last year. Misstatements below $21,000, 5% of materiality, are treated as clearly trivial and not accumulated. Messier et al. (2005) reviewed research showing wide variation in materiality judgments across auditors and firms, which is one reason the team documents its reasoning (Public Company Accounting Oversight Board, 2010).
The Audit Risk Model
Audit risk is the chance of a clean opinion going out on statements that in fact contain a material error. It has two parts: the risk of material misstatement, which combines inherent risk and control risk and exists independently of the audit, and detection risk, the chance that the team's own tests miss an error that is there. The team cannot change the risk of material misstatement; it can only assess it. It controls detection risk by choosing the nature, timing and extent of procedures. Where the risk of material misstatement is high, detection risk must be set low, which means more and stronger testing (American Institute of Certified Public Accountants, 2021).
Because outside parties rely heavily on the statements, the team sets acceptable audit risk low.
Revenue From Home Closings
The builder recognizes revenue when a home closes and title passes to the buyer. Inherent risk is high: closings cluster at month and year end, pressure to meet the lender's covenants gives management a reason to accelerate closings and upgrades sold after contract complicate the transaction price. Control risk is assessed as moderate after walkthroughs showed that closing statements are reconciled to revenue by the controller. Auditing standards presume a fraud risk in revenue recognition, and the team does not rebut it. Revenue recognition cutoff is a significant risk.
Homes Under Construction
Inventory of land, lots and homes under construction is $64 million. Inherent risk is high because costs must be allocated among lots and homes, capitalized interest must be computed and communities must be tested for impairment if market prices fall. The team assesses control risk as moderate and identifies impairment of one slow-selling community as a significant risk.
Warranty Reserve
The builder provides one-year workmanship and ten-year structural warranties. The $2.6 million reserve is an estimate based on claims history. Inherent risk is moderate to high because estimates are subjective and the builder changed framing subcontractors this year. Control risk is moderate.
Cash
Cash of $11 million is held at two banks and reconciled monthly by staff independent of disbursements. Inherent risk is low, and control risk is assessed as low after tests of the reconciliation control.
Management Override
In every audit, the risk that management overrides controls is a significant risk. The team will test journal entries, especially those posted late, by senior staff or to unusual accounts, review estimates for bias and evaluate the business rationale for unusual transactions.
Understanding the Entity
Risk assessment rests on understanding the business. The team read the builder's board minutes, reviewed permits and closings by community, toured two communities under construction and compared the builder's margins with those of public home builders. It learned that interest rates had reduced traffic in one community of larger homes, that the builder had changed its framing subcontractor after quality complaints and that the lender's covenant requires tangible net worth above a set level at year end. Each fact points to a risk: slow sales to impairment, the subcontractor change to warranty costs and the covenant to pressure on year-end results. Without this understanding, the risk assessments above would be guesses.
How Risk Shapes the Plan
For revenue, the team will examine closing statements and title documents for every closing in the last ten days of the year and the first ten days of the next, confirm selected sales with title companies and compare revenue by community with closing records. For inventory, it will test cost allocations on a sample of homes, recompute capitalized interest and evaluate management's impairment analysis for the slow community, using the team's own estimates of selling prices. For the warranty reserve, it will compare prior estimates with actual claims and inquire about the new subcontractor's defect rates. For cash, it will confirm balances and review reconciliations but perform less detailed testing.
Most substantive work on revenue and inventory will be performed at year end rather than at an interim date, since timing matters most where risk is highest.
Conclusion
The audit of the home builder begins with materiality of $420,000 and performance materiality of $294,000, chosen for the users who rely on its statements. Risk assessment points the team to revenue cutoff, inventory impairment, the warranty estimate and management override, and away from cash. The plan responds with more persuasive, year-end procedures where risk is high, which is how the audit risk model turns judgment into work.
References
American Institute of Certified Public Accountants. (2021). Understanding the entity and its environment and assessing the risks of material misstatement (Statement on Auditing Standards No. 145).
Messier, W. F., Jr., Martinov-Bennie, N., & Eilifsen, A. (2005). A review and integration of empirical research on materiality: Two decades later. Auditing: A Journal of Practice & Theory, 24(2), 153-187. https://doi.org/10.2308/aud.2005.24.2.153
Public Company Accounting Oversight Board. (2010). Consideration of materiality in planning and performing an audit (Auditing Standard No. 11).
What the ACC 491 Week 3 instructions ask
The ACC 491 Week 3 assignment usually asks students to plan an audit using materiality and risk. Typical requirements include choosing a benchmark and percentage for overall materiality, setting performance materiality and a threshold for trivial misstatements, explaining the components of audit risk and how they relate, assessing inherent and control risk for accounts and assertions, identifying significant risks, including fraud risks, and describing how the assessment affects the audit plan. Some prompts supply financial data; others ask students to apply the concepts to a company they choose. Calculations and judgments should be explained and supported by auditing standards and research in APA style.
How this ACC 491 Week 3 example is built
A home builder makes risk assessment concrete because its revenue depends on when each home closes, its inventory of partly built homes requires cost allocation and estimates and its warranty reserve is a forecast. The paper sets materiality first, explaining the benchmark and why pretax income is used even though it varies. It then walks through the audit risk model, keeping acceptable audit risk low because a bank and bonding company rely on the statements. Each major account is assessed in turn, with the reasons for its risk level. Significant risks are named. The final section translates each assessment into planned procedures, so the reader sees how planning drives the work.
ACC 491 Week 3 grading rubric: where the points go
Faculty typically assign credit for a reasonable, justified materiality calculation, a correct explanation of audit risk and its components, account-level risk assessments with stated reasons and a clear link between assessed risk and planned procedures. Materiality should use an appropriate benchmark and percentage, with performance materiality set lower to allow for undetected misstatements. Inherent and control risk must be assessed at the assertion level, not only overall. Revenue recognition fraud risk should be addressed or its rebuttal justified. The plan should show that higher risk leads to more persuasive evidence. Clear reasoning, organized headings and APA references to the risk standards and to research on materiality complete the rubric.
ACC 491 Week 3 help: mistakes to avoid
ACC 491 Week 3 papers often compute materiality without explaining the benchmark. Say why pretax income, revenue or assets suits this company, and why the percentage is appropriate. Another error is treating detection risk as something the auditor assesses; it is the risk the auditor sets by choosing procedures. Students also assess risk only for the statements as a whole. Do it for accounts and assertions. Remember the presumed fraud risk in revenue recognition and the risk of management override, which exist in every audit. Show how a higher risk changes procedures, for example more substantive testing at year end. Finally, keep performance materiality below overall materiality and explain in a sentence why the gap exists.
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ACC 491 Week 3 questions, answered
What does ACC/491 Week 3 usually cover?
It usually covers audit planning with materiality and risk: setting materiality and performance materiality, the audit risk model, assessing inherent and control risk, significant and fraud risks and how risk shapes the audit plan.
Where can I find a free ACC 491 Week 3 sample paper?
The home builder audit plan on this page sets materiality, assesses risk account by account and links each risk to procedures, with margin notes. Tell us about your case and we will write the first plan for you free.
What is performance materiality?
An amount set below overall materiality, often 50% to 75% of it, to reduce the chance that undetected and uncorrected misstatements together exceed materiality.
What is the audit risk model?
Audit risk equals the risk of material misstatement, made up of inherent and control risk, times detection risk; the auditor sets detection risk to keep overall audit risk acceptably low.
Why is revenue recognition presumed to be a fraud risk?
Because revenue is a common target for manipulation, auditing standards presume a risk of fraud in revenue recognition unless the auditor can justify rebutting it for a particular company.
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