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npeelman npeelman
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5 years ago
A) Explain how auditors use the audit risk model when planning an audit.

B) Describe the audit risk model and each of its components.
Textbook 

Auditing: The Art and Science of Assurance Engagements, Canadian Edition


Edition: 12th
Authors:
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victroxvictrox
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A) The audit risk model is used primarily for planning purposes in deciding how much evidence to accumulate in each cycle. The auditor decides an acceptable level of audit risk, assesses inherent risk and control risk, and then uses the relationship depicted in the following model to determine an appropriate level for detection risk, so as not to provide an unqualified opinion when material errors do in fact exist in the financial statements:

PDR = 

B) The planning form of the audit risk model is stated as follows:

PDR = 

where:
PDR = planned detection risk
AR = audit risk
IR = inherent risk
CR = control risk

Detection risk is a measure of the risk that audit evidence for an account will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. Detection risk determines the amount of substantive evidence that the auditor plans to accumulate.

Audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. It is influenced primarily by the degree to which external users will rely on the statements, the likelihood that a client will have financial difficulties after the audit report is issued, and the auditor's evaluation of management's integrity.

Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of internal control.

Control risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in an account will not be prevented or detected by the client's internal controls.
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npeelman Author
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4 years ago
Thanks DUDE
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