AUDIT RISK

I. Audit Risk
A. What is audit risk?
B. What is material misstatement?
1.
2.
3.Misstatement may be either known or likely
a. Known misstatement
b. Likely misstatement
C. Audit Risk Model
1. AR = RMM X DR
2. Audit risk: quantitatively (%) or non-quantitatively (high, m
edium, low)
3. Risk of Material Misstatement (RMM = IR X CR) Auditor cannot
change
a.
b.
c. Inherent Risk (IR)
d. control Risk (CR)
e.
4. Detection Risk (DR) Auditor can change
a. Tests of details risk (TD)
b. Analytical procedures risk (AP)
5. Effect on the Audit
a. Inverse relationship of RMM to DR
b. The auditor can change detection risk
by varying the nature, extent and timing of audi
r procedures
c. Substantive Procedures Required
II. Audit risk and materiality - Consideration during an audit
A. Overall considerations
1. Audit risk and materiality should be considered together in d
esigning the nature, extent , and timing of audit procedures
and in evalutating the results of those procedrues
2. Consideration of audit risk and materiality are affected by t
he size and complexity of the entity, as well as
the auditor's experience with and knwoledge of the entity, it
s environement and its internal control
3. considered as financial statement level and the accoun balanc
e, individual transaction class,or disclosure item level
B. Consideration at the F/S level
Audit risk at the F/S level often relates to the entity's contro
l environment
1. Purpose
Consideration of audit risk materiliaty at the F/S level
are used to:
a. Design risk assessment procedures
b. Idenify and assess risk
c. Design further audit procedures
d. Evaluate the F/S taken as a whole
2. Audior's response
a. The competency of personnel assigned to the engagemen
t
b. The potential need for a specialist
c. The appropriate level of supervision of assistants
C. Considerations at the Account balance, transaction class, or disclosu
re item level
1. Purpose
The audit risk model may be useful in this regard
2. Inverse Relatinship between audit risk and materility
 As materiality decreases, audit risk increase
(more material a misstatement is, the less likely it is
that the auditor will miss it.)