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What are the components of the audit risk model? How does the audit risk model impact an audit plan? Answer

What are the components of the audit risk model? How does the audit risk model impact an audit plan?

The three components of audit risk are referred to respectively as inherent risk [IR], control risk [CR] and detection risk [DR].

This gives rise to the audit risk model of: AR = IR x CR x DR,

IR, inherent risk, is the perceived level of risk that a material misstatement may occur in the client’s unaudited financial statements, or underlying levels of aggregation, in the absence of internal control procedures.

CR, control risk, is the perceived level of risk that a material misstatement in the client’s unaudited financial statements, or underlying levels of aggregation, will not be detected and corrected by the management’s internal control procedures.

DR, detection risk, is the perceived level of risk that a material misstatement in the client’s unaudited financial statements, or underlying levels of aggregation, will not be detected by the auditor.

The audit plan must incorporate the risk assessment performed before the engagement and identify any areas that require more substantive testing and examination. The results of the assessment of inherent risk, control risk and detection risk will direct the auditor to staff the job with experienced, capable personnel, who are properly supervised, and to set appropriate materiality and sampling levels.

The risk level will determine how work papers are prepared and how much review of field work is performed before an audit opinion is signed. Accounting firms must have policies and procedures that provide guidance for difficult audit plans in order to ensure that quality controls are in place.

GARG, K. (n.d.). scribd. In Audit And Assurance -Basics. Retrieved April 10, 2012, from http://www.scribd.com/doc/52589122/35/Components-of-Audit-Risk Hertog, T. (n.d.).ehow. In The Impact of Audit Risk Model on an Audit Plan.Retrieved April 10, 2012, from http://www.ehow.com/facts_7639318_impact-risk-model-audit-plan.html.

Response 2

The components of the audit risk model are:

–       Relate risk to potential misstatements in the financial statements, either at the financial statement level (risks that have a pervasive effect on the financial statements) or the assertion level (risks that relate to particular assertions).

–       Consider whether risks are of a magnitude that will result in a material misstatement in the financial statements.

–       Consider the likelihood that risks will result in material misstatements.

The audit plan must incorporate the risk assessment performed before the engagement and identify any areas that require more substantive testing and examination. The results of the assessment of inherent risk, control risk and detection risk will direct the auditor to staff the job with experienced, capable personnel, who are properly supervised, and to set appropriate materiality and sampling levels.

Reference:

Boynton, W. C., & Johnson, R. N. (2006).Modern auditing: Assurance services and the integrity of financial reporting. (8th ed.). Hoboken, NJ: Wiley.

 

http://www.ehow.com/facts_7639318_impact-risk-model-audit-plan.html

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