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Audit risk model - Audit risk model Auditors deal with risk...

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Audit risk model Auditors deal with risk in planning audit evidence primarily by applying audit risk model Comes from professional literature on audit sampling (AU350) and materiality and risk (AU312) Helps auditor decide how much and what types of evidence to accumulate in each cycle PDR = AAR ÷ (IR × CR) Where: PDR = Planned detection risk AAR = Acceptable audit risk IR = Inherent risk CR = Control risk 1. Planned detection risk: (PDR) Is the risk that audit evidence for a segment will fail to detect misstatements exceeding tolerable misstatement. Depend on other 3 factors in the model Will change only if auditor changes one of the other risk model factors Determines amount of substantive evidence that the auditor plans to accumulate, inversely with size PDR If PDR reduced, more evidence needed to achieve the reduced planned risk 2. Inherent Risk: (IR) Measure the auditor’s assessment of the likelihood that there are material
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