Audit risk model

Audit risk model

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  The Audit RiskModel Lanfei Gao, Michael Andrews, and Shanaka DeSilva,
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  Audit Risk Therisk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated First fundamental concept of audit procedures
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  Contents of AuditRisk Detailed level: Account Balance Class of Transactions Assertion Material Misstatement Risk -Inherent risk -Control risk Detection risk
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  Engagement Risk Anauditor’s exposure to financial loss and damage to professional reputation. client and third party lawsuits negative publicity
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  Audit Risk ModelInherent risk (IR) – The likelihood that a material misstatement exist. Control risk (CR)- Risk that the misstatement will not be prevented, or detected and corrected on a timely basis by the entity's internal control. Risk Material Misstatement; RMM = CR x IR Detection risk (DR) – Effectiveness of the audit procedure.
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  Audit Risk ModelAudit Risk Model Equation: AR = RMM x DR Requires professional judgment Highly subjective Not intended to be a precise formula
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  How to Usethe Audit Risk Model
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  Limitations of theAudit Risk Model The desired level of audit risk may not actually be achieved It does not consider potential auditor error Does not consider nonsampling risk
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  Thank You! Whatare the components of the Audit Risk Model? What is the Audit Risk Model Formula? How is the Audit Risk Model used? What are the Audit Risk Model’s Limitations? Audit, Inherent, Detection, Control AR = IR x CR x DR or AR = RMM x DR Determine Audit Risk, Determine RMM, Solve for DR Audit Risk Level may not be achieved, does not consider auditor error, does not consider nonsampling risk