Question

4. Explain the meaning of the term audit risk assessment. Explain the structure and use of the audit risk model.

Answer 1

Audit risk is the risk that auditors issued the incorrect audit opinion to the audited financial statements. The auditor assesses the risks at the entity control level deep dive into the risks related to activities control level that could significantly affect the quality of financial information. ...

risk model is a tool used by auditors to understand the relationship between various risks arising from an audit engagement enabling them to manage the overall audit risk. Audit risk model suggests that overall audit risk of an engagement is the product of the following three component risks:

• Inherent Risk
• Control Risk
• Detection Risk

This is often represented in equation form as follows:

Audit Risk = Inherent Risk × Control Risk × Detection Risk

Since inherent risk and control risk make up risk of material misstatement, therefore another way to state audit risk model is:

Audit Risk = Risk of Material Misstatement × Detection Risk