Explore BrainMass

Explore BrainMass

    Audit risk model and components

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Helpful Information:
    Audit risk model:

    PDR = AAR/IR*CR

    PDR = planned detection risk
    AAR = acceptable audit risk
    IR = inherent risk
    CR = control risk

    Problem:
    Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit inventory.

    Situation

    Risk 1 2 3 4 5 6

    Acceptable audit risk high high low low high medium
    Inherent risk low high high low medium medium
    Control risk low low high high medium medium
    Planned detection risk ----- ----- ----- ----- ----- -----
    Planned evidence ----- ----- ----- ----- ----- -----
    a) Explain what low, medium, and high mean for each of the four risks and planned evidence.
    b) Fill in the blanks for planned detection risk and planned evidence using the terms low, medium, or high
    c) Using your knowledge of the relationships among the foregoing factors, state the effect on planned evidence (increase or decrease) of changing each of the following five factors, while the other three remain constant:
    (1) An increase in acceptable audit risk
    (2) An increase in control risk
    (3) An increase in planned detection risk
    (4) An increase in inherent risk
    (5) An increase in inherent risk and a decrease in control risk of the same amount

    © BrainMass Inc. brainmass.com June 3, 2020, 8:09 pm ad1c9bdddf
    https://brainmass.com/business/auditing/audit-risk-model-components-126261

    Attachments

    Solution Preview

    Acceptable audit risk
    High: The low expected reliance on the audited financial statements is reflected in the high acceptable audit risk;
    Medium; a medium expected reliance on the financial statements is reflected in medium acceptable audit risk.
    Low: A high reliance on the audited financial statements is reflected in lower acceptable audit risk;

    Inherent risk:
    High: If the perceived level of risk that a misstatement may happen in the un audited financial statements or underlying levels of aggregation will not be detected and rectified is high the inherent risk is high.
    Medium; If the perceived level of risk that a misstatement may happen in the un audited financial statements or underlying levels of aggregation will not be detected and rectified is medium the inherent risk is medium.
    Low If the perceived level of risk that a misstatement may happen in the un audited financial ...

    Solution Summary

    This answer provides you an excellent discussion on Audit risk model

    $2.19

    ADVERTISEMENT