[Dan T]

So I just signed up to ask this..

I have a problem with understanding detection risk, it is the chance that the auditor wont find a material misstatement..so why would decreasing substantive tests help.

Example: say DR is at .99.. that means there is a 99% chance that the auditor wont find a material misstatement so wouldn’t more tests be necessary??? Basically saying you have a 1% chance of finding a material misstatement if it exists, so wouldnt you need to test more to try and find one??

Am I not looking at this the right way? Any advice would be appreciated

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[wizards8507]

mtaylo24 and CPATaxed are spot on.

You have the cause and effect relationship backwards. You're thinking “there's lots of risk so we need to test more.” More risk = more testing. But it's the opposite. You do more testing in order to lower the risk. More testing = less risk.

NY CPA

[Dan T]

Hmm ok thanks so..auditor wants these:

Audit risk – lower?

Detection risk – higher?

IR and CR – lower?

Sampling risk – lower?

This is what is throwing me off ha….also would you want all rates lower in sampling? (ex. Tolerable error rate, Expected population rate…)

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[Dan T]

Hmm ok thanks so..auditor wants these:

Audit risk – lower?

Detection risk – higher?

IR and CR – lower?

Sampling risk – lower?

This is what is throwing me off ha….also would you want all rates lower in sampling? (ex. Tolerable error rate, Expected population rate…)

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[jeff]

eh…no.

Time for NINJA Notes 😀

[jeff]

eh…no.

Time for NINJA Notes 😀

[Anonymous]

@workstudysleep – WRONG!!!!!!!!! The auditor doesn't necessarily “want” the level of risks to be anything. It all depends on “gaining an understanding of internal control to design the nature, timing, and extent of audit procedures”.

Think of this equation:

AR/(IR x CR) = DR

So when the RMM is low, meaning that the internal controls are solid, DR will go up and that means you will need less substantive procedures because you can rely on your internal controls.

If RMM is higher, DR will go down, and you must perform more substantive procedures to accomodate for the fact that you want the DR to be lower.

The auditor is only able to control DR!

[Anonymous]

@workstudysleep – WRONG!!!!!!!!! The auditor doesn't necessarily “want” the level of risks to be anything. It all depends on “gaining an understanding of internal control to design the nature, timing, and extent of audit procedures”.

Think of this equation:

AR/(IR x CR) = DR

So when the RMM is low, meaning that the internal controls are solid, DR will go up and that means you will need less substantive procedures because you can rely on your internal controls.

If RMM is higher, DR will go down, and you must perform more substantive procedures to accomodate for the fact that you want the DR to be lower.

The auditor is only able to control DR!

[Dan T]

thanks that helps.. i gotta stop quantifying everything and just focus on the concepts

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[Dan T]

thanks that helps.. i gotta stop quantifying everything and just focus on the concepts

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[Dan T]

Ok so i know that as detection risk decreases substantive testing should increase to raise it..but this question is a little confusing to me.

As the acceptable level of detection risk decreases, the assurance directly provided from:

a. Substantive tests should increase

b. Substantive tests should decrease.

c. Tests of controls should increase

d. Tests of controls should decrease

So as DR decreases shouldn't the reliability of the testing also decrease since you are performing more tests to compensate?

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[Dan T]

Ok so i know that as detection risk decreases substantive testing should increase to raise it..but this question is a little confusing to me.

As the acceptable level of detection risk decreases, the assurance directly provided from:

a. Substantive tests should increase

b. Substantive tests should decrease.

c. Tests of controls should increase

d. Tests of controls should decrease

So as DR decreases shouldn't the reliability of the testing also decrease since you are performing more tests to compensate?

AUD - 75 ☺
FAR - 65, 71, 70, 77 ☺
BEC - 80 ☺
REG - 73, 66, 79 ☺ 2/28/15

Done!

[barelystayingsane]

“Ok so i know that as detection risk decreases substantive testing should increase to raise it.” This is not correct. Your acceptable level of detection risk should decrease as the risk of material misstatement increases. Detection risk is the risk that the auditor will fail to detect a material misstatement. Obviously, as the risk of material misstatement increase, you are willing to accept a lower detection risk. Because you are willing to accept less detection risk, you must perform more substantive procedures. More substantive testing does NOT raise your detection risk.

If you are decreasing your detection risk, it means that your risk of material misstatement has increased, so you want more, NOT less, reliable evidence.

[barelystayingsane]

“Ok so i know that as detection risk decreases substantive testing should increase to raise it.” This is not correct. Your acceptable level of detection risk should decrease as the risk of material misstatement increases. Detection risk is the risk that the auditor will fail to detect a material misstatement. Obviously, as the risk of material misstatement increase, you are willing to accept a lower detection risk. Because you are willing to accept less detection risk, you must perform more substantive procedures. More substantive testing does NOT raise your detection risk.

If you are decreasing your detection risk, it means that your risk of material misstatement has increased, so you want more, NOT less, reliable evidence.

[jeff]

@Work – I think you are confusing “acceptable detection risk” and “detection risk” in regards to substantive procedures.

[jeff]

@Work – I think you are confusing “acceptable detection risk” and “detection risk” in regards to substantive procedures.

[Author]

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