[Givemesleep]

Need clarification please. I came across this question in my study material:

Assuming total audit risk stays constant, and while the A/R person is out on vacation someone discovers a a big problem regarding frauduelent postings to the A/R ledger. What is the effect on control risk and inherent risk. Obvisouly this has do with AR = CR x IR x DR. Would control risk increase, decrease or no effect? same with inherent risk, Increase, decrease or stay the same? I can never remember which direction. The overal audit risk staying the same is making me second quess my undestanding.

Thanks

Reg 11/15/2011 - 80
Aud 02/28/2012 - 81
Bec 05/31/2012 - 78
Far 08/31/2012 - 83 Do you believe in Miracles, YES !!!

CPA License received 10/2012 !!
CFE License received 04/2013 !!
EA License received

Givemesleep

[rezaking]

I would think CR would increase.. I hate this stuff… I had similar things on the exam and completely gave up on them.. I know that DR and RMM have an inverse relationship.. so if CR goes up, DR goes down because your doing more work.

correct me if im wrong please.. anyone.

BEC - Passed
REG - 7/21/2012
AUD - 8/18/2012
FAR - 11/10/2012

[kmwgrace]

flagging this one because I get confused on it too.

~ Kate... MTX!
CPA exam on hold while I homeschool my 6 year old!

[Anonymous]

It's been a long time since I took AUD, but I'll take a shot at this….

Inherent risk is just the nature of the beast. Nobody really can control this. It's just the risk that a misstatement is inherently there.

Control risk is the risk that the controls of the company will not detect the misstatement.

Detection risk is the risk that you, the auditor, will not detect the misstatement.

If IR goes up, then CR goes up because the more risk that the misstatement is inherently there, then more likely controls will not catch it. Since you know that there is a high risk involved, you, as an auditor, are going to do more substantive tests in your audit. Thus, DR decreases because you're working harder.

If IR and CR is low, then there's not much risk involved, so you, as an auditor, are going to do less substantive tests. Thus, DR goes up since you're doing less work.

The reason for all of this is that auditors try to be efficient in their audit. If more work is not needed due to low IR and CR, then they won't bother wasting time doing lots of substantive tests.

So yeah, I would assume IR and CR goes up and DR goes down in this situation of yours.

[rezaking]

CPAMans explaination is right on. and i knew all this by heart and yet one of the sims on this topic killed me..it seems like such an easy thing and i completely understand it (not just memorized) but amazingly they were able to word those stupid things and give me 10 options to pick from on each one just to confuse the hell outa me.

BEC - Passed
REG - 7/21/2012
AUD - 8/18/2012
FAR - 11/10/2012

[Givemesleep]

these answers help alot, thanks to all. I agree. CR increases, not sure about IR,since it contemplates risk with no controls. Seems like IR would have no changem it is what it is? good work my friends. Stay thirsty.

Ironicially I always say stay thirsty and my horoscope said stay thrify on the day of the exam.

Reg 11/15/2011 - 80
Aud 02/28/2012 - 81
Bec 05/31/2012 - 78
Far 08/31/2012 - 83 Do you believe in Miracles, YES !!!

CPA License received 10/2012 !!
CFE License received 04/2013 !!
EA License received

Givemesleep

[Givemesleep]

Rezak – I hear ya dude.

Reg 11/15/2011 - 80
Aud 02/28/2012 - 81
Bec 05/31/2012 - 78
Far 08/31/2012 - 83 Do you believe in Miracles, YES !!!

CPA License received 10/2012 !!
CFE License received 04/2013 !!
EA License received

Givemesleep

[Justinnnn]

Although the “assessment of inhere/control risk” may change, you do not change the risk itself. You don't increase and decrease control or inherent risk; the facts present themselves to change the assessment. If you think they are the same thing, think again.

It would be helpful if you posted actual MCQs I can help further.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[unsure97]

I also took AUD on 2/28/12 and also thought the whole exam was quite difficult. I also not sure 100% what the answer to the Q posted above… the target score release date is 3/7/12 but does anyone know about how long it takes for snail state to get the score??

[Anonymous]

Quoting… If IR goes up, then CR goes up

Are you sure this statement correct? I thought IR and CR were independent of each other.

[Justinnnn]

@apbandj – Even the concept that they “go up” is incorrect, on top of what you are questioning. In theory, the conditions of IR and CR exist, they aren't changed by the auditor, they just exist.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[Anonymous]

@justinn – I sort of understand what you are saying and know that DR is the only risk that is controlled by the auditor. Let me ask you this… and I'm going to quantify it just for simplicity's sake…. say IR is 3 – do you think as a result of this CR would automatically be at least a 3 and then adjusted upward for the additional CR factors? Or do you think that IR and CR are entirely independent of each other?

[jeff]

Reza nailed it. CR goes up … IR is the same… DR goes down because you're forced to do more work. AR is constant.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jeff]

Git yoself some ninja AUDio.

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Author]

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