Auditing

Audit Risk should be considered when planning and performing an audit of financial statements in accordance with generally accepted auditing standards.

1. Define audit risk

Audit risk is the likelihood that an auditor may unintentionally fail to modify their opinion on financial statements that are materially misstated. At the overall financial level, audit risk is the chance that a material misstatement exists in the financial statements and the auditors do not detect it with their audit procedures.

2. Describe its components of inherent risk, control risk, and detection risk.

Inherent risk denotes the likelihood of a material misstatement happening before the internal control is considered.

Control risk refers to the risk in which a material misstatement will not be stopped or spotted in a timely manner by the client’s internal control.

Detection risk refers to the risk that the auditors will fail to detect a material misstatement that exists in a relevant. Detection risk is a function of the effectiveness of the audit procedures and their application by the auditors.

3. Explain the interrelationship among these components.

The risks change inversely from one another. When the inherent and control risks are low, the greater the acceptable detection risks. Conversely, the greater the inherent or control risk, the lower would be the acceptable detection risk.

4. Comment on the following: "Since cash is often less than 1 percent of total assets, inherent and control risk for the account must be low. Accordingly, detection risk should be established at a high level."

This statement is incorrect as it oversees the liquid nature of case and its high rate of gross revenue. During the year, a large amount of cash is generated and disbursed allowing for material misstatement, the probability of misappropriation and other inappropriate usage. Inherent risk for the account generally goes up. The control risk is centered on the functional...