Risk Model

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ACCT 4372: Chapter 2, Question 19 -- RISK MODEL PROBLEM

Type your answers. You may increase space for answers if needed or decrease space if not needed. Please leave at least one space between your answer and the next requirement.

Print and submit completed assignment in class on date noted in syllabus and Blackboard Assignment.

Legend: IR = inherent risk; CR = control risk; DR = detection risk; AR = audit risk

a. DR = __________ when IR = 0.5, CR = 0.3; and AR = 0.05. Show work, using Audit Risk Model.

DR = AR/(CR*IR) = 0.05/ (0.3*0.5) = 0.33

b. Evidence gathered to support the assessment of IR and CR?

The auditor does not require to gather evidence to support the assessment of IR. If the CR is less than 100%, then the assessment must be supported by evidence of control test. When the CR is maximum, the evidence is gathered using substantive tests.

c. (1) New DR = ______ if increase CR from 0.3 to 0.5 (all other factors remain constant).

DR = 0.05/(0.5*0.5) = 0.2

(2) Will you perform more or less substantive test work when CR is 0.5 rather than 0.3? Explain using Audit Risk Model.

According to the Audit Risk model, the lower the detection risk the higher the risk of material misstatement. When CR is 0.3, the DR is 0.33 and with CR of 0.5 the DR is 0.2. As the CR increased the detection risk reduced. Therefore more substantive tests will be conducted.

(3) Will you perform more or less control test work when CR is 0.3 rather than 0.5? Explain using the Audit Risk Model.

Control Risk is identified as low, medium, high, and maximum. A CR of 0.5 is assessed as medium risk and a CR of 0.3 is assessed as low risk. According to the Audit Risk Model, a lower risk means less control tests need be performed.

d. If you decrease CR from 0.7 to 0.5, will you do more or less control testing? Substantive testing? Explain using Audit Risk Model.

DR =...