Audit Risk = RMM × DR Audit Risk = IR × CR × DR can you...

Audit Risk = RMM × DR
Audit Risk = IR × CR × DR

can you explain the components of RMM (IR and CR) please ? Thank you

Solutions

Expert Solution

Audit is a kind of inspection work.

Inspection carries two types of risks:

Type I: to accept a defective material

Type II: to reject a good material (non-defective)

In case of audit work, the audit risk is Type I risk ie, risk that the materially incorrect Financial Statement being certified by the auditor.

Hence two components of audit risks are

Risk of misstatement
Risk of detection

Audit Risk(AR)=DR*IR*CR

DR=Detection Risk

IR=Inherent Risk

CR=Control Risk

IR or inherent risk is the risk of an error or misstatement without considering internal controls. As the name suggests, this is the inherent risk in any operation.

CR or control risks is the risk that the internal control system in place (policies, procedures, checks and balances) fail to prevent or detect the error or misstatement .

DR or detection risk is the risk that the auditor will fail to detect a material misstatement

Audit Risk and detection risks are related to the auditors’ competence. Inherent Risk and Control Risk are related to client and its systems. These are independent of the auditor

Inherent Risks depends upon various factors like: Nature of business, IT environment of the client, integrity of management, clients motivation for misstatement, related party transactions, conflict of interest etc

Control Risks depends on the adequacy and type of controls in place in the clients organization

ekkarill92 answered 10 months ago

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