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AUDIT PLANNING
2
2-1. Audit risk: The risk that the auditor may unknowingly fail to appropriately modify
his/her opinion of financial statements that are materially misstated.
Inherent risk: Relates to the susceptibility of an account balance or class of
transactions to error that could be material. . .assuming that there were no related
internal controls.
Control risk: The risk that material errors or irregularities are not prevented or
detected by the system of internal control.
Detection risk: The risk that errors or irregularities which are not prevented or
detected by the system of internal control, are not detected by the independent
auditor.
2-2. Study of the business and industry, and application of analytical procedures during the
planning stage of the audit assist in evaluating inherent risk. These procedures
may permit the auditor to assess inherent risk below the initial 100% assumed
level.
Audit risk (AR) = Inherent risk (IR) x Control risk (CR) x Detection risk (DR)
b. The audit risk model is useful in managing audit risk for assertions. By
determining planned audit risk for an assertion, assessing inherent and control
2-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
risks, an auditor can determine the allowable detection risk (the amount of
detection risk an auditor can allow) for an assertion. Allowable detection risk
is used to determine the nature, timing, and extent of audit procedures for the
assertion.
2-5. The amount of audit evidence an auditor must gather varies inversely with allowable
detection risk. As allowable detection risk decreases, the amount of evidence
required increases, and vice versa. Chapter 2 introduces audit procedures and
discusses how auditors modify audit procedures to obtain sufficient competent
evidential matter by changing (1) the nature, (2) the timing, or (3) the extent of
procedures.
In the third situation, the auditor does not have to accumulate any evidence
because inherent risk and control risk give the appropriate level of planned
audit risk.
2-11. a. 1. Audit risk is the risk that the auditor may unknowingly fail to
appropriately modify an opinion on financial statements that are
materially misstated.
Detection risk is the risk that an auditor’s procedures will lead the auditor
to conclude that error in an account balance or class of transactions that
could be material, when aggregated with error in other balances or
classes, does not exist, when in fact such error does exist.
3. Inherent risk and control risk differ from detection risk in that they exist
independently of the audit of financial statements, whereas detection risk
relates to the auditor’s procedures and can be changed at the auditor’s
discretion. Detection risk should bear an inverse relationship to inherent
and control risk. The less inherent and control risk the auditor believes
exists, the greater the acceptable detection risk.
2-12. The primary issue raised here is how friendly an auditor should be with client
personnel. This situation is especially interesting in light of the auditor’s view of
the relationship prior to being assigned significant responsibility. The issue is
whether Josie is trying to become friendly in order to try to manipulate the
auditor’s decisions.