[Anonymous]

Ok so I understand the inverse relationship between RMM and DR. My question is since you do more substantive tests if DR is low. Does that mean planning to do more substantive tests in this years audit raises DR? If not, what does doing more substantive tests do to your audit risk equation.

Thanks in advance!

[taxman89]

if detection risk is low than you dont need to do as much substantive testing (because risk is low) as you would if detection risk was high…..if you do additional (more than planned) substantive testing that lowers detection risk (because it is less like a material misstatement will go undetected since you have test more items).

If you are doing more substantive tests than p/y and everything else has stayed the same, then your detection risk should decrease (and therefore your audit risk will decrease as well).

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

if detection risk is low than you dont need to do as much substantive testing (because risk is low) as you would if detection risk was high…..if you do additional (more than planned) substantive testing that lowers detection risk (because it is less like a material misstatement will go undetected since you have test more items).

If you are doing more substantive tests than p/y and everything else has stayed the same, then your detection risk should decrease (and therefore your audit risk will decrease as well).

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[Study Monk]

I am hoping you got it backwards, because my test is tomorrow and I just stopped studying. Detection risk is determined by the quality of the auditors and the procedures they use to do the audit. You don't “do more substantive tests if DR is low” You do more substantive tests to GET DR low. The more substantive tests you do the lower DR goes.

You basically use substantive tests as your risk adjustment device. This is the only risk that the auditor has control of. He can assess(estimate) that control risk is low, but he doesn't control it(its either low or its high). DR on the other hand is the only type of risk that the auditor can control. If you can afford more detection risk than you do less substantive tests and if you need to lower detection risk than you do more substantive tests.

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

I am hoping you got it backwards, because my test is tomorrow and I just stopped studying. Detection risk is determined by the quality of the auditors and the procedures they use to do the audit. You don't “do more substantive tests if DR is low” You do more substantive tests to GET DR low. The more substantive tests you do the lower DR goes.

You basically use substantive tests as your risk adjustment device. This is the only risk that the auditor has control of. He can assess(estimate) that control risk is low, but he doesn't control it(its either low or its high). DR on the other hand is the only type of risk that the auditor can control. If you can afford more detection risk than you do less substantive tests and if you need to lower detection risk than you do more substantive tests.

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[F15hy]

You're correct Monk. Auditor's use substantive tests to change DR, which is the only element they can change in the formula. Inherent Risk and Control Risk can not be adjusted by an Auditor or their procedures.

CA Candidate

B-79 (4th Attempt, finally killed you Nov 2013)
A-81 (3rd Attempt, Feb 2014) AND I AM DONE!!!!!
R-80 (1st Attempt, Feb 2013)
F-77 (2nd attempt, Jan 2014)

Becker, Becker Final Review, NINJA 10-Point Combo
($M.O.B$)

CA Ethics-92%

[F15hy]

You're correct Monk. Auditor's use substantive tests to change DR, which is the only element they can change in the formula. Inherent Risk and Control Risk can not be adjusted by an Auditor or their procedures.

CA Candidate

B-79 (4th Attempt, finally killed you Nov 2013)
A-81 (3rd Attempt, Feb 2014) AND I AM DONE!!!!!
R-80 (1st Attempt, Feb 2013)
F-77 (2nd attempt, Jan 2014)

Becker, Becker Final Review, NINJA 10-Point Combo
($M.O.B$)

CA Ethics-92%

[taxman89]

you are right study monk 😀 we both have a handle on it. time to crush aud tomorrow!

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

you are right study monk 😀 we both have a handle on it. time to crush aud tomorrow!

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[Study Monk]

@taxman we got 1 question right only 90 more to go 😉

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Study Monk]

@taxman we got 1 question right only 90 more to go 😉

I spoke to an ancient wise man who sent me on a mushroom induced journey through an ancient forest to find the key to passing the CPA exam. A talking spider monkey told me to throw the last of my drinking water in the dirt to find what I was looking for. So I followed his instructions and the following message appeared in the soil:

"Do 5000 multiple choice questions for each section"

[Anonymous]

I guess I understand it backwards. I thought if the assessed level of RMM was high, the auditor would lower detection risk so that it would equal the audit risk it desired.

[Anonymous]

I guess I understand it backwards. I thought if the assessed level of RMM was high, the auditor would lower detection risk so that it would equal the audit risk it desired.

[taxman89]

AR=DRxCRxIR

after understanding the entity auditor uses professional judgement to determine CR, IR, and DR (given the amount of originally planned substantive testing). If the total audit risk is higher than desired the auditor can increase the amount of substantive testing done which would lower the DR. If the total AR is lower then needed the auditor can decrease the amount of substantive testing done which would result in a more efficient audit.

study monk-tell me about it. tho i am more worried about the 7sims than the 90 m/c lol

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

AR=DRxCRxIR

after understanding the entity auditor uses professional judgement to determine CR, IR, and DR (given the amount of originally planned substantive testing). If the total audit risk is higher than desired the auditor can increase the amount of substantive testing done which would lower the DR. If the total AR is lower then needed the auditor can decrease the amount of substantive testing done which would result in a more efficient audit.

study monk-tell me about it. tho i am more worried about the 7sims than the 90 m/c lol

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[taxman89]

at the risk of pissing off jeff…..just came across this part in his ninja notes

Auditor CAN control DR

§ Do more testing at year-end

§ Increase substantive testing

o Less Acceptable DR = Run More Substantive Tests

o More Acceptable DR = Run Less Substantive Tests

o More Substantive Tests = Less Audit Risk

§ Detection Risk decreases

§ (↓AR = IR x CR x ↓DR)

o Less Substantive Tests = More Audit Risk

§ Detection Risk increases

§ (↑AR = IR x CR x ↑DR)

its only one page and no one can say it better than jeff (if i suck up maybe he wont mind that i posted 1/2 a page of his notes:D)

Aud-75 3x I knew i never liked you
Bec-77 1x being in the bubble is stressful
Reg-82 4x its not me its you...and no we cant be friends
Far-78 1x easiest section

[Author]

Replies