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Audi Risk Model

In: Business and Management

Submitted By sabber
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AUDIT RISK MODEL Audit Risk (AR): risk that auditor will opine (render an opinion) with an unqualified opinion when unknown to auditor, FS are materially misstated (ultimate risk) Inherent Risk (IR): risk that errors (or misstatements or deviations) will occur," clientcontrolled Control Risk (CR): risk that client's internal control system will fail to prevent/ detect/correct errors ... clientcontrolled Detection Risk (DRI_ risk that auditor's procedures will fail to detect errors ... auditorcontrolled AR IR * CR * OR Audit risk = inherent risk * control risk * detection risk Audit risk: always set priority at a low level (.0 1, 05, 10) Inherent risk: controlled by client ... function of type of business, degree of liquidity, complexity Control risk: controlled by client ... relates to effectiveness of client's control system in preventing, detecting, and correcting errors. Detection risk: controlled by auditor ... function of nature, timing, and extent of audit procedures applied ... allowable or acceptable Solution Set: (1) Detection risk = audit risk / (inherent risk * control risk) (2) Detection risk low ... the more evidence you have to collect (3) Detection risk high ... the less evidence you have to collect Audit Risk: risk that auditor issues unqualified opinion when statements are materially misstated, audit risk and detection risk exactly related. IR/CR and detection risk inversely related. Mgmt Assertions: (1) existence or occurrence (2) completeness (3) rights and obligations (4) valuation (5) presentation and disclosure *auditor's judgment about risks are based on assertions *assertions translated to account balances, then create audit objectives and procedures Inherent Risk Factors: (1) nature of activities...

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