Question

For each of the following independent statements, state whether you agree or disagree with the statement and fully explain your answer.

Required

a.        The level of audit risk is low when inherent risk is low.

b.        When the auditor assesses control risk and inherent risk as high, the acceptable detection risk is        low.

c.        When an audit firm issues the correct opinion on the financial statements under audit, it still has    engagement risk.

d.        If detection risk is high, the auditor is required to gather more evidence through substantive       procedures.

Answer 1

a)

Overall audit risk is high when inherent risk is low. disagree because the overall risk is a result of detection risk, inherent risk, and control risk so high degree of these risk will increase the degree of overall risk and low degree of inherent risk will decrease the overall risk.

b)

When the auditor assesses control risk and inherent risk as low, the acceptable detection risk is high.agree because there is an inverse relationship between detection risk and the combined level of inherent and control risks.

c)

When an audit firm issues the correct opinion on the financial statements under audit, it still has engagement risk agree because in engagement risk continues till there is a client relationship with the audit firm.

d)

If detection risk is high, the auditor is required to gather more evidence through substantive procedures.-disagree because  If a high detection risk is acceptable, less substantive testing is required because you don’t need to lower it.