BUS 426 Chapter Notes - Chapter 7: Audit Evidence, Audit Risk, Internal Control
19 Sep 2012
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Risk means the acceptance by auditors that there is some level of uncertainty in performing the audit function. Audit risk model: a formal model reflecting the relationships among audit risk (ar), inherent risk (ir), control risk (cr) and planned detection (pd) Ar = ir x cr x pdr. Mainly used to decide how much evidence to accumulate in each cycle. Cr: if pdr = 2%, then auditor needs to provide 98% assurance. Auditor plans 2 percent risk of not detecting errors and so seeks 98 percent assurance from substantive tests . See page 210 for relationship of these risks. The likelihood is that if the client goes bankrupt after the audit, they may sue the auditors. Factors that affect business risks: the degree to which external users rely on the statements. Larger the client size, more widely used the statements.
