Indicate whether you agree or disagree with each of the statements. Present the rationale for your answer.
(Audit Risk Model) A staff auditor was listening to a conversation
between two senior auditors regarding the audit risk model. Following
are some statements made in that conversation regarding the audit risk
Indicate whether you agree or disagree with each of the statements.
Present the rationale for your answer. (Short but direct Rationale, I
am preparing for a similar test and want to review the subject)
Audit risk can be applied quantitatively or qualitatively. In essence,
it is a concept used to ensure that the auditor gathers sufficient
evidence to render an opinion on the financial statements with little
likelihood of being wrong.
Setting audit risk at 5 percent is a valid setting for controlling audit
risk at a low level only if the auditor assumes that inherent risk is
100 percent, or significantly greater than the real level of inherent
Inherent risk may be very small for some accounts (for example, the
recording of sales transactions at a Wal-Mart). In fact, some inherent
risks may be close to 0.01 percent. In such cases, the auditor does not
need to perform direct tests of account balances if he or she can be
assured that inherent risk is indeed that low.
Control risk refers to both (a) the design of controls and (b) the
operation of controls. To assess control risk as low, the auditor must
gather evidence on both the design and operation of controls.
Detection risk at 50 percent implies that the direct test of the account
balance has a 50 percent chance of not detecting a material
Audit risk should vary inversely with engagement risk: The higher the
risk with being associated with the client, the lower should be the
audit risk taken.
In analyzing the audit risk model, it is important to understand that
much of it is judgmental. For example, setting audit risk is judgmental,
assessing inherent and control risk is judgmental, and setting detection
risk is influenced by the individual risk preferences of the auditor.
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