Question

Describe the relationship between the components of audit risk and audit evidence.

Answer 1

Ans.

Audit Evidence

Any information used by the auditor to draw conclusions which forms the basis of auditors opinion is known as audit evidence . It includes both information contained in accounting records and other information.

An audit evidence must be sufficient and appropriate.

Sufficiency is measure of quantity of audit evidence

Appropriateness is measure of quality of audit evidence

Audit Risk

The risk that the auditor may give inappropriate opinion on financial statement that is misstated materially is known as Audit Risk.There are 3 components of audit risk and they are as follows:

a) Inherent Risk

b) Control Risk

c) Detection Risk

Audit Risk = Inherent Risk × Control Risk × Detection Risk

Inherent risk and control risk are inversely related to detection risk

a) Inherent Risk

The susceptibility of an assertion about transaction or class of transaction , balances of accounts or any disclosures made to a material mistatemnet

Relationship with Audit Evidence

Inherent risk is directly/positively related to audit evidence i.e higher the inherent risk, higher the audit evidences to be obtained and vice versa .

b) Control Risk

It refers to the risk that the entities internal control system's would fail to prevent or detect or correct the material misstatements of transaction or balances of accounts or disclosure on timely basis.

Relationship with Audit Evidence

Control risk and audit evidence are directly/positively related i.e higher the control risk , higher the audit evidences to be obtained and vise versa.

c) Detection Risk

It refers to the risk that the procedures performed by the auditor to reduce audit risk to acceptably low level will not detect material misstatements

Relationship with Audit Evidence

Detection risk is inversely/negatively related to audit evidence i.e If the risk of material misstatements is greater, then the lower detection risk is accepted and thereby more Audit Evidences are to be obtained and vice versa.

Conclusion

Audit Risk	Audit Evidence
Inherent Risk	Directly/Positively Related
Control Risk	Directly/Positively Related
Detection Risk	Inversely/Negatively Related

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