Question

understand the relationship between Control Risk and Detection Risk, and

understand the relationship between Control Risk and substantive tests

Answer 1

Answer-Audit Risk refers to the risk that an auditors may issue an unqualified report due to the auditors failure to detect material misstatement either due to error or fraud.

Audit risk=Inherent Risk x Control risk x Detection Risk

Control Risk-It refers to the risk that a misstatement could occur but may not be detected and corrected or prevented by the entity's internal control mechanism.Example control may be high in a entity where separation of duties is not well defined.

Detection risk- It is the probability that the audit procedures may fail to detect existence of a material error or fraud.

Relationship Between control risk and detection risk

While control risk depends on the strength or weakness of the internal control procedures,Detection Risk is either due to sampling error or human factors.When Control is high ,detection risk is also high.When control Risk is low Detection Risk is also low.

Relationship between control risk and substantive tests-

Audit perform substantive test to check control risk with respect to completness ,accuracy and validity of the transaction.Based on the result of this assessment audit decide whether additional procrdure is required to obtain sufficient and appropriate audit evidence