Question

In four sentences or less, describe the purpose of the audit risk model.

Answer 1

Solution:

Audit risk model = AR = IR *CR * DR

Where, IR = Inherent risk

CR = Control Risk

DR = Detection Risk

Inherent Risk is the risk of a material misstatement assuming no internal controls.

Control Risk is the risk of the internal control failing to detect a material misstatement.

Detection Risk is the risk of the audit procedures failing to detect a material misstatement.

The purpose of audit risk model is to determine the nature, extent, and timing of evidence to gather for audit testing. Further audit risk model reduce detection risk by increasing substantive audit procedures