Question

Explain how you can reduce the audit risk to an acceptable Low level

Answer 1

There are 3 elements of Audit risk i.e Inherent Risk ,Detection Risk and Control Risk.

Auditor uses the audit risk model in order to manage the overall risk of an audit engagement to examine the inherent and control risk which is pertaining to an audit engagement by gaining and understanding the entity and its environment

An inherent risk, we assume that there were no internal controls and it is the susceptibility of an account balance or class of transaction to a material misstatement

Control risk isban audit risk in which auditor will not be able to prevent or detect or correct any material misstatement on a timely basis by internal control system. Detection risk is the risk in which no material misstatement will be detected by auditor's substantive procedure

There exist an inverse relationship between the combined level of inherent and control risk and detection. Therefore in order to reduce the overall audit risk to unacceptably low level the auditor should try to reduce the detection risk to an acceptable low level when the inherent and control risk are high. However it is not possible to eliminate the need to perform substantive procedures by the auditor as the assessed levels of inherent and control risk cannot be sufficiently low.