Audit Risk Model Explained. For students and CPA Candidates.

 You can find video lectures explained the audit risk model and its components (control risk, planned detection risk, inherent risk) in my auditing course and CPA exam lessons. Browse from menu above.

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Audit risk model—a formal model reflecting the relationships between acceptable audit risk (AAR), inherent risk (IR), control risk (CR), and planned detection risk (PDR); PDR = AAR/(IR * CR)

Control risk—a measure of the auditor’s assessment of the risk that a material misstatement could occur in an assertion and not be prevented, or detected and corrected, on a timely basis by the client’s internal controls.

Inherent risk—a measure of the auditor’s assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control

Engagement risk—the risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report issued for the client was correct.

Planned detection risk is the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality. There are two key points to know about planned detection risk. Planned detection risk is dependent on the other three factors in the model. It will change only if the auditor changes one of the other risk model factors. Planned detection risk determines the amount of substantive evidence that the auditor plans to accumulate, inversely with the size of planned detection risk. If planned detection risk is reduced.

Inherent risk measures the auditor’s assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal con-trols. If the auditor concludes that a high likelihood of misstatement exists, the auditor will conclude that inherent risk is high. Internal controls are ignored in setting inherent risk because they are considered separately in the audit risk model as control risk.

Control risk measures the auditor’s assessment of the risk that a material misstatement could occur in an assertion and not be prevented, or detected and corrected, on a timely basis by the client’s internal controls. Assume that the auditor concludes that internal controls are completely ineffective to prevent or detect and correct misstatements.