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Interrelation Of The Various Risk (Ir, Cr, & Dr)
For a specified degree of audit risk, there remains an inverse relationship between the assessed degrees of inherent risk and control risk for the assertion and the degree of detection risk which an auditor might accept for such an assertion. Therefore, the lower the inherent risk and control risk assessment, the higher is the acceptable degree of detection risk. Inherent risk and control risk link to the circumstances of the client while the detection risk remains controllable by an auditor.
Thus, an auditor controls audit via the adjustment of detection risk based on the assessed degrees of inherent risk and control risk. In relating the audit risk components, the auditor might express every component quantitatively, like percentage or non-quantitatively as low, very low, moderate, and high alongside maximum. In either instance, a comprehension of the interrelationship expressed in audit risk model remains essential in the determination of the panned acceptable degree of detection risk.
Thus, the audit risks vary inversely from each other. The lesser control risk or inherent risk the auditor believes available, the higher the acceptable detection risk. On the other hand, the higher the inherent risk or control risk the auditor believes available, the lesser the acceptable detection risk.
Inherent Risk (IR) & Control Risk (CR) |
Detection Risk (DR) |
If the IR and CR are higher, |
There would be low DR |
If the IR is higher and CR is low |
The DR will be higher since CR will offset the higher IR |
If IR and CR are both low |
The DR will be higher |
If IR remains low yet CR is higher |
DR will be extremely low indicating a sign of error or fraud |
If the IR and CR remain higher, the DR is low because if CR remains higher, IR remains weak and cannot be depended upon hence substantive testing needed.
If IR and CR remain low, DR is higher because CR remains low, implying that IR remains strong hence depended on thus less substantive testing to surge the DR.
The auditor must focus on either reducing DR or material misstatement to reduce audit risk. If misstatement remains higher, the auditor would have to suggest an entity to make alterations to its control system (CS) to identify misstatement internally.
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Mock, Theodore J., Rajendra P. Srivastava, and Arnold M. Wright. "Fraud risk assessment using the fraud risk model as a decision aid." Journal of emerging technologies in accounting 14, no. 1 (2017): 37-56.
WANG, S. F., & JIANG, J. Y. (2016). Audit-risk Relationship Model Optimization of the Risk Factors Systems Supported. DEStech Transactions on Social Science, Education and Human Science, (icssd).
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