Page 1 WGU master’s in accounting Advanced
WGU master’s
Auditing D251
in accounting
Performance
Advanced
Task Auditing D251 Performance Task.pdf
WGU master’s in accounting
Advanced Auditing: D251
December 15, 2023
D251 Performance Task
A. THE PURPOSE OF THE AUDIT RISK MODEL
The Audit Risk Model is a helpful tool to evaluate the risks associated with an audit.
This model highlights the ways to minimize those risks and considers all the relevant
factors to calculate the audit risk. The audit risk is calculated by multiplying the
inherent risk with the control and detection risk.
The auditor calculates the risk of material misstatement by multiplying inherent risk
and control risk. This calculation determines the level of detection risk that the
auditor will allow. The risk level of a misstatement in financial reporting and the risk
of failing to detect such errors are inversely related. This means a higher risk of
material misstatement will lead to a lower detection risk and vice versa. Therefore, if
the risk of material misstatement is high, the detection risk must be kept low, while if
the risk of material misstatement is low, the detection risk can be higher.
B. ENGAGEMENT RISK
KMHS Manufacturing Inc. faces a significant risk of engagement due to multiple
factors. The first and foremost reason for this high risk is the impact of the pandemic,
which had a severe effect on the casino industry. With many casinos closed, the
demand for KMHS's products witnessed a sharp decline, leading to a decrease in
revenue. Furthermore, the CEO, COO, and CFO's investment as shareholders poses
an additional risk. The personal stake of these top executives may influence the
decision-making process and lead to financial misrepresentations that could put
stakeholders at risk. The company's extensive debt and the post-pandemic economic
climate may also lead to stakeholders borrowing more money against the company to
meet their financial obligations, further increasing the risk. If the interest rates go up,
it can pose a challenge for the company to pay off its debt. This, in turn, can lead to a
This study source was downloaded by 1827175 from cliffsnotes.com on 01-08-2026 17:30:33 GMT -06:00
-2026 WGU master’s in accounting Advanced
WGUAuditing
master’s
D251 in
Performance
accounting Advanced
Task Auditing D251 Performance Task
https://www.cliffsnotes.com//study-notes/26678291
, Page 2 WGU master’s in accounting Advanced
WGU master’s
Auditing D251
in accounting
Performance
Advanced
Task Auditing D251 Performance Task.pdf
situation where the company may have to compromise on KMHS's revenue.
Therefore, it is crucial to keep an eye on the company's indebtedness and take
necessary measures to ensure its financial stability.
C-1. INHERENT RISK
According to Appendix E, the revenue cycle poses a high risk due to several factors.
Firstly, management can override internal controls and generate false payables to
conceal fraudulent activities. Secondly, the casino lacks well-defined cutoffs for
revenue recognition, potentially resulting in revenue recognition before goods are
shipped or received or by altering the period of goods received. Thirdly, selling
transactions with recourse suggests a history of defective services or products,
requiring buyers to demand full recourse if the casino's obligation is insufficient.
Lastly, generating receivables without actual sales is a method of boosting revenue on
the books without legitimate revenue, which does not exist.
C-2. CONTROL RISK
Inadequate controls pose a high risk of control, which may lead to material
misstatements. One contributing factor is the absence of reconciliation between
shipping and billing records. Auditors should be able to trace receivables to the goods
themselves with a bill of lading. Failure to do so may support C1 findings where
receivables are sometimes absent. Additionally, supervisory approval is lacking in
shipping documents, highlighting control deficiencies.
Furthermore, segregation of duties is not practiced in the credit-issuing department.
The employee who approves credit is also responsible for authorizing credit sales,
which opens a window for giving unlimited credit and creating false sales. This
loophole can be exploited for personal gain, such as increasing revenue, bonuses, or
promotions.
Lastly, the sales department's control measures fail because a single password is used
for all employee activity. The company cannot track individual employee activity,
making verifying sales or detecting material misstatements difficult. Identifying the
root cause of any misstatement is also challenging without proper control measures.
This study source was downloaded by 1827175 from cliffsnotes.com on 01-08-2026 17:30:33 GMT -06:00
-2026 WGU master’s in accounting Advanced
WGUAuditing
master’s
D251 in
Performance
accounting Advanced
Task Auditing D251 Performance Task
https://www.cliffsnotes.com//study-notes/26678291
WGU master’s
Auditing D251
in accounting
Performance
Advanced
Task Auditing D251 Performance Task.pdf
WGU master’s in accounting
Advanced Auditing: D251
December 15, 2023
D251 Performance Task
A. THE PURPOSE OF THE AUDIT RISK MODEL
The Audit Risk Model is a helpful tool to evaluate the risks associated with an audit.
This model highlights the ways to minimize those risks and considers all the relevant
factors to calculate the audit risk. The audit risk is calculated by multiplying the
inherent risk with the control and detection risk.
The auditor calculates the risk of material misstatement by multiplying inherent risk
and control risk. This calculation determines the level of detection risk that the
auditor will allow. The risk level of a misstatement in financial reporting and the risk
of failing to detect such errors are inversely related. This means a higher risk of
material misstatement will lead to a lower detection risk and vice versa. Therefore, if
the risk of material misstatement is high, the detection risk must be kept low, while if
the risk of material misstatement is low, the detection risk can be higher.
B. ENGAGEMENT RISK
KMHS Manufacturing Inc. faces a significant risk of engagement due to multiple
factors. The first and foremost reason for this high risk is the impact of the pandemic,
which had a severe effect on the casino industry. With many casinos closed, the
demand for KMHS's products witnessed a sharp decline, leading to a decrease in
revenue. Furthermore, the CEO, COO, and CFO's investment as shareholders poses
an additional risk. The personal stake of these top executives may influence the
decision-making process and lead to financial misrepresentations that could put
stakeholders at risk. The company's extensive debt and the post-pandemic economic
climate may also lead to stakeholders borrowing more money against the company to
meet their financial obligations, further increasing the risk. If the interest rates go up,
it can pose a challenge for the company to pay off its debt. This, in turn, can lead to a
This study source was downloaded by 1827175 from cliffsnotes.com on 01-08-2026 17:30:33 GMT -06:00
-2026 WGU master’s in accounting Advanced
WGUAuditing
master’s
D251 in
Performance
accounting Advanced
Task Auditing D251 Performance Task
https://www.cliffsnotes.com//study-notes/26678291
, Page 2 WGU master’s in accounting Advanced
WGU master’s
Auditing D251
in accounting
Performance
Advanced
Task Auditing D251 Performance Task.pdf
situation where the company may have to compromise on KMHS's revenue.
Therefore, it is crucial to keep an eye on the company's indebtedness and take
necessary measures to ensure its financial stability.
C-1. INHERENT RISK
According to Appendix E, the revenue cycle poses a high risk due to several factors.
Firstly, management can override internal controls and generate false payables to
conceal fraudulent activities. Secondly, the casino lacks well-defined cutoffs for
revenue recognition, potentially resulting in revenue recognition before goods are
shipped or received or by altering the period of goods received. Thirdly, selling
transactions with recourse suggests a history of defective services or products,
requiring buyers to demand full recourse if the casino's obligation is insufficient.
Lastly, generating receivables without actual sales is a method of boosting revenue on
the books without legitimate revenue, which does not exist.
C-2. CONTROL RISK
Inadequate controls pose a high risk of control, which may lead to material
misstatements. One contributing factor is the absence of reconciliation between
shipping and billing records. Auditors should be able to trace receivables to the goods
themselves with a bill of lading. Failure to do so may support C1 findings where
receivables are sometimes absent. Additionally, supervisory approval is lacking in
shipping documents, highlighting control deficiencies.
Furthermore, segregation of duties is not practiced in the credit-issuing department.
The employee who approves credit is also responsible for authorizing credit sales,
which opens a window for giving unlimited credit and creating false sales. This
loophole can be exploited for personal gain, such as increasing revenue, bonuses, or
promotions.
Lastly, the sales department's control measures fail because a single password is used
for all employee activity. The company cannot track individual employee activity,
making verifying sales or detecting material misstatements difficult. Identifying the
root cause of any misstatement is also challenging without proper control measures.
This study source was downloaded by 1827175 from cliffsnotes.com on 01-08-2026 17:30:33 GMT -06:00
-2026 WGU master’s in accounting Advanced
WGUAuditing
master’s
D251 in
Performance
accounting Advanced
Task Auditing D251 Performance Task
https://www.cliffsnotes.com//study-notes/26678291
