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Audit risk model, inherent risk, control risk, detection ris

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Answer the following questions to define the audit risk model and its components:

1.Define the audit risk model.
2.What is meant by control risk? What is the effect on the amount of evidence the auditor must gather and evaluate when control risk is decreased from high to low?
3.What is meant by inherent risk? Identify four factors that make for high inherent risk in audits.
4.What is meant by acceptable audit risk? What is its relevance to evidence accumulation?
5.What is meant by planned detection risk? What is the effect on the amount of evidence the auditor must gather and evaluate when planned detection risk is increased from medium to high?

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Solution Summary

Your discussion is 792 words that include five examples of high inherent risk, examples of how to find detection risk for low, medium and high risk clients and discussion in everyday language to help you learn this.

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1.Define the audit risk model.

The audit risk model shows the elements that impact audit risk:

AR = IR x CR x DR
AR: Audit risk
IR: Inherent Risk
CR: Control Risk
DR: Detection Risk

2.What is meant by control risk? What is the effect on the amount of evidence the auditor must gather and evaluate when control risk is decreased from high to low?

Control risk is the risk that the controls will not detect an error (intentional or accidental) made in the system of generating financial reports. That is, what is the chance (in percent) that an error in is the financial records? 100% would be "certain"? right? So, setting the control risk at 100% means that you don't think the controls are working, or working well enough, to avoid errors getting through. A lower percent reflects a higher degree of confidence in the control system to catch errors. As you become more confident, you have to test the controls (more interim testing) but you can do less substantive testing (year-end evidence of the correct balances and disclosures) because you believe the controls have made the amounts less risky.

3.What is meant by inherent risk? Identify four factors that make for ...

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Carol Sargent, PhD
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  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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