Audit%20Risk%20Model%20Activity%20%28October%203%2c%202011%29

Audit%20Risk%20Model%20Activity%20%28October%203%2c%202011%29

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Accountancy 405 Fall 2011 THE DEFINITIVE SUMMARY OF THE AUDIT RISK MODEL ( Warning: alphabet soup of abbreviations coming ) This is a prefatory editorial about the AUDIT RISK MODEL (ARM): This model has shortcomings, but we have to live with  it.  PCAOB audit standards indicate that auditors should use the ARM.  AUDIT RISK MODEL per  AS 8 AR = IR x CR x DR AR = Audit Risk IR =  Inherent Risk CR =  Control Risk DR =  Detection Risk Audit Risk – the risk that the auditor expresses an inappropriate opinion (i.e., “clean” opinion) when the financial statements are materially misstated. An ________________ opinion is expressed when the auditor concludes that the financial statements give a true and fair view or are presented fairly, in all material respects, in accordance with the applicable financial reporting framework AR is a fully _____________________function of the risk of material misstatement (i.e., the risk that the financial statements are materially misstated prior to audit) and the risk that the auditor will not detect such misstatement (“detection risk”). RMM – Risk of material misstatement; it’s the combination of IR and CR. IR -  the susceptibility of an assertion to a misstatement, that could be material, individually or when aggregated with other misstatements assuming that there were no related internal controls   The auditor  assesses       inherent risk based on his/her observation of the client's business, management's integrity, the  routineness of transactions, the makeup of various populations, etc.  The auditor cannot  directly influence IR.   CR - the risk that a misstatement that could occur in an assertion and that could be material, individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity’s internal control CR - Similar to IR, the auditor  assesses  control risk, based on his/her understanding and testing of the client's internal control  structure.  Similar to IR, the strength of the client's internal control structure is exogenous to the auditor (i.e., the auditor  cannot  directly influence the actual strength of the client's internal control structure).   Important :  The auditor does decide how extensively to test the client's internal control structure.  If the auditor decides  for cost/benefit reasons to NOT test controls beyond that necessary to obtain an understanding of the client's internal  structure and help plan the audit, the auditor must ________________________. This is true even if testing controls would have justified assessing CR below the maximum.  
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Audit%20Risk%20Model%20Activity%20%28October%203%2c%202011%29

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