Audit Risk Model
The audit risk model expresses audit risk as a function of inherent risk, control risk, and detection risk: AR = IR × CR × DR.
Explanation
Audit risk is the risk that the auditor issues an unmodified opinion when the financial statements are materially misstated. Inherent risk is the susceptibility of an assertion to material misstatement before considering controls. Control risk is the risk that internal controls fail to prevent or detect a misstatement. Detection risk is the risk that audit procedures fail to detect a material misstatement. The auditor controls detection risk by adjusting the nature, timing, and extent of substantive procedures.
Key Points
- •AR = IR × CR × DR
- •Inherent and control risk are assessed; detection risk is controlled by the auditor
- •Lower assessed risk of material misstatement allows higher detection risk
Exam Tip
If inherent or control risk increases, the auditor must decrease detection risk by performing more substantive procedures.
Frequently Asked Questions
Related Topics
Audit Planning
Audit planning is the process of developing an overall strategy and detailed approach for the expected nature, timing, and extent of an audit engagement.
Substantive Procedures
Substantive procedures are audit procedures designed to detect material misstatements at the assertion level, including tests of details and substantive analytical procedures.
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