Question

Please explain in detail, the audit risk model and how this model integrates with the Auditor's "gaining an understanding of the entity, including its internal control, to assess the risk of material misstatement whether due to fraud or erroe, and to develop the nature, timing and extent of further audit procedures. Please explain audit risk model, its risk components and what they mean?

Answer 1

Audit risk model:

Audit risk model is a toolused by the auditrors to understand the relationship between various risks arising from an audit engagement, It enables them to manage the overall audit risk/

It is the risk that the auditor may unknowingly fail to detect the material misstatements which has its impact on the opinion he has to give on the financial sa=tatements of the client.

Components of Audit Risk:

The following are the 3 components of audit risk, the product of which results in overall audit risk.

Control Risk

Detection risk

Inherent risk

1. Control Risk- It is the risk that the potential material misstatements would not be detected or prevented by the client's control system.

2. Detection risk-This is the risk that the audit procedures used are not capable of detecting a material misstatement.

3. Inherent risk- This is the risk that a client's financial statements are susceptible to material misstatements.

The auditor can frame an audit plan by using this audit risk model, The higher the risk level the more audit procedures need to be performed by the auditor to reduce his risk and viceversa.