Question

The auditor concludes that the clients inherent risk is 40% and control risk is 60%. The auditor decides to test controls in order to be able to rely on controls. The auditor plans to conduct year-end substantive audit procedures in order to achieve a detection risk of 30%. What is the probability that that auditor will discover a material misstatement during the year-end substantive audit procedures?

Answer = 1.68 [(.6 X .4) X 7]

Why?????

Answer 1

inherent risk of 40% means that there is 40% probalitity that there shall be a material misstatement.

control risk of 60% means that there is 60% probability that the internal controls placed by the management shall not be able to detect material misstatement.

multiplying inherent risk and control risk gives audit risk of 24% (40% * 60%)

audit risk of 24% means that there is 24% probability that there is a material misstatement in the statement and which has not been detected by the management. so now it is upto the auditor to detect this material misstatement.

there is a detection risk of 30% which means that there is 30% probability that the auditor shall not be able to detect material misstatement which implies that there is 70% probability that auditor shall be able to detect material misstatement.

so, the probability that that auditor will discover a material misstatement during the year-end substantive audit procedures = 24% * 70% = 1.68%