08 -- Tests of Controls

08 -- Tests of Controls - CPA AUDITING - STUDY UNIT 8 Tests...

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CPA AUDITING - STUDY UNIT 8 Tests of Controls: Core Concepts A. Audit risk is the risk that the auditor may unknowingly fail to modify the opinion on financial statements that are materially misstated. Its components are inherent risk (the susceptibility of an assertion to a material misstatement assuming no related controls exist), control risk (the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity’s internal control), and detection risk (the risk that the auditor will not detect a material misstatement that exists in an assertion). 1. The assessed level of control risk is an evaluation of the effectiveness of internal control in preventing or detecting material misstatements of specific assertions. The auditor may assess control risk at the maximum because controls are unlikely to pertain to an assertion, controls are unlikely to be effective, or evaluating effectiveness would be inefficient. Assessing control risk below the maximum
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