Question

The following three risk situations have been identified in the audit of Tatua.

		Situation
	1	2	3
Acceptable Audit Risk	7%	6%	6%
Inherent Risk	30%	30%	50%
Control Risk	40%	50%	25%
Planned Detection Risk	?	?	?

Required:

1. Calculate the planned detection risk for each situation.                            

Provide your answer for question (a) in the below table.

		Situation
	1	2	3
Provide your workings here
Planned detection risk

2. In which situation auditors need to do more audit procedures to

collect evidence?                                                                                    

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Answer 1

		Situation
	1	2	3
Planned detection risk Working: (FORMULA) AUDIT RISK= INHERENT RISK * CONTROL RISK * DETECTION RISK	58.33% DR= AR/(IR*CR) DR= 0.07/(0.30*0.40) DR= 58.33%	40% DR= AR/(IR*CR) DR= 0.06/(0.30*0.50) DR= 40.00%	48% DR= AR/(IR*CR) DR= 0.06/(0.50*0.25) DR= 48%

ANSWER B:

From the above calculation of Detection Risk under 3 different situations, we can clearly see that Detection Risk (DR) is highest in Situation 1 and lowest in Situation 2. Thus, an auditor has to do more auditing procedures to collect Audit Evidences in Situation 1 due to highest Detection Risk.