Question

Ch.9 Discussion topic the following question with 2-parts: From reading and study of chapter: (1) Please describe the audit risk model (RMM: risk of material misstatement model) based on your own understanding and explain the each term (factor) in the model in terms of how each factor affects to the overall audit risk (increase or decrease) and amount of audit evidence (nature, timing, and extent of evidence). (2) Also, describe its interrelationships among each of FOUR factors of the risk model; inherent risk, control risk, and detection risk at an acceptable audit engagement risk level. L directly proportional vs. inversely proportional, dependent, independent, positive, negative, etc..)

Answer 1

AUDIT Risk in very broad terms, audit risk is the risk of a material misstatement of a financial statement item that is or should be included in the audited financial statements of an entity. In theory, audit risk ranges anywhere from zero, where there is complete certainty of no material misstatement, to one, where there is complete certainty of a material misstatement. In practice, however, audit risk is always greater than zero. There is always some risk of material misstatement as it is not possible, (except for the audit of the simplest of financial statements), due to the limitations inherent in both accounting and auditing, to be absolutely certain that a material misstatement will not exist.“Audit risk” is the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Such misstatements can result from either fraud or error.

inherent risk – It is the susceptibility of an account balance or class of transaction to misstatements that could be material, either individually or when taken together with misstatements in other balances or classes, assuming that there were no internal controls.

Control risk- It is the risk that misstatement, that could occur in an account balance or class of transactions and that could be material, either individually or when taken together with misstatements in other balances or classes, will not be prevented/detected/corrected on a timely basis by the accounting and internal control systems.

Detection risk -It is the risk that an auditor’s substantive procedures (the procedures designed to obtain evidence as to the completeness, accuracy and validity of the data produced by the accounting system) will not detect a misstatement that exists in account balance or class of transactions that could be material, either individually or when taken together with misstatements in other balances or classes