By applying the audit risk model, the auditor is able to identify the different kind
of risk that he could face during the audit process. Also, by applying that model he is able
to decide the amount of evidence that he should accumulate for each cycle.
Planning Detection
Risk (PDR) = Acceptable Audit Risk (AAR)
Inherent Risk (IR) X Control Risk (CR)
AAR = PDR X IR X CR
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Accounting and Financial Control Department Auditing W 2017
a. Client size.
b. Distribution of ownership.
2. The possibility that the client will have financial difficulties after the audit report
is issued:
a. Liquidity position.
c. Methods of Financing.
e. Management Competence.
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Accounting and Financial Control Department Auditing W 2017
Exercise Sheet
Question 1:
Following are six situations that involve the audit risk model as it is used for
planning audit evidence requirements. Numbers are used only to help you
understand the relationships among factors in the risk model
Risk 1 2 3 4 5
Acceptable Audit Risk 5% 5% 5% 5% 1%
Inherent Risk 100% 40% 60% 20% 100%
Control Risk 100% 60% 40% 30% 100%
Planned Detection Risk ------ ---- ---- ---- -----
Required:
A- Explain what each of the four risk means?
C- Which situation requires the greatest amount of evidence and which requires
the least?
D- Using your knowledge of the relationships among the foregoing factors, state
the effect on planned detection risk (increase or decrease) of changing each of the
following factors while the other two remain constant:
1- A decrease in acceptable audit risk.
2- A decrease in control risk.
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Accounting and Financial Control Department Auditing W 2017
Required: Identify which of the following audit risk model components relates most
directly to each of the above eight risk factors along with stating the effect on such risk
(increase or decrease):
Acceptable Audit Risk.
Inherent Risk.
Answer:
Risk Factor Related Audit Risk Model Component Effect on the risk
1.
2.
3.
4.
5.
6.
7.
8.