Audit risk is the risk that the auditor expresses an

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. The auditor considers audit risk when planning and performing an examination of financial statements in accordance with auditing standards. In connection with this, the auditor considers the relevant assertion level because this directly assists the auditor to plan the appropriate audit procedures for those transactions, accounts, or disclosures. The auditor uses the audit risk model as a framework for assessing audit risk and to determine the nature, extent, and timing (that is the level of audit procedures to be performed) that should be performed in order to reduce the audit risk to an acceptable low level. The statutory financial statements of Almighty Limited have been audited by CPA & Co for a few years. In implementing the ARM, the quantitative approach has been used by the auditor and the components of the audit risk identified and determined at the current year’s planning stage are as follows:

Internal control risk – 60%

Inherent risk – 60%

Audit risk – 10%

Detection risk – 28%

Required:

(a) Inherent risk, control risk, and detection risk are the components of audit risk. Explain how these components are interrelated.

(b) During the course of the current year’s audit, the auditor noted some changes in circumstances that require a reassessment of the nature, extent, and timing of the audit. In this connection, the auditor noted that the inherent risk should be revised to 70% whilst the internal control risk as reassessed should be 80%.

(i) What do you think would be the impact of these changes on the detection risk if the auditor wants to maintain the audit risk at the same level?

(ii) What does it mean to the level of audit procedures to be performed as a result of the above reassessment?

Explain your answers for (i) and (ii) above.

 

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