Question

what is the relevance of the audit risk model at the time of planning an audit?

Answer 1

An audit risk model is used at the time of planning an audit. It refers to a conceptual tool that is applied by auditors to quantify the audit strategy’s assertion level. It comes with a widescale practical application and helps decide on the types of evidence and how much would need to be accumulated for each relevant assertion.

Some relevance of the audit risk model are as follows-

1.It is the best tool or technique which is applied during the planning stage and only possesses little value in terms of evaluating audit performance.

2. The audit risk model indicates the type of evidence that needs to be collected for each transaction class, disclosures, and account balances.

3. It is considered the first step in the risk assessment.

So When the likelihood of an error was high, the audit risk model dominated business risk in the explanation of the audit investment, and the fee did not contain a risk premium. When the likelihood of irregularity was high, business risk dominated the audit risk model in the explanation of the audit investment, and the fee contained a risk premium. These results suggest that the ability of the audit risk model to describe auditor behavior and the inclination of auditors to charge a risk premium depend upon the nature of the risks present in the audit. In the presence of errors, the audit risk model adequately described audit-planning decisions; in the presence of irregularities, it did not.

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