[Anonymous]

Hi, everyone. I have a question about inherent risk, control risk and detection risk

On the Ninja Note I bought, it states that inherent risk and detection risk have inverse relationship. So if inherent risk increase, detection risk would decrease. But I read it somewhere on Becker states detection risk is only effected by more or less substantive test that the auditor perform.

So lets say if the company is changing from an unacceptable accounting method to GAAP. Inherent risk increase, does detection risk decrease? The question does not state the audit risk has to stay the same level. I know if the question states the audit risk need to stay the same, then auditor would do more substantive test to decrease detection risk. What if the question does not state that? Or we assume that audit risk need to stay the same?

Please…really need help, taking exam on Monday

[leglock]

hopefully others will chime in because this is an extremely important topic. extremely important.

When I worked these problems, I always assumed audit risk was being held constant.

Others currently taking audit will hopefully provide an indepth answer.

[Anonymous]

@leglock So you would do increase inherent risk, and decrease detection risk and no effect on control risk?

[taxman89]

“I know if the question states the audit risk need to stay the same, then auditor would do more substantive test to decrease detection risk.”

bingo. You are supposed to assume there is a fixed acceptable level of of audit risk. this always irritated me because it wasnt the increase in inherent risk that really caused the decrease in detection risk, it was the increased testing. But it really is logical if you think about it. increase inherent risk=increased testing, increased testing=lower detection risk…

on of the many reason i hate hate hate auditing

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

[Anonymous]

An increase in inherent risk increases audit risk (AR = control risk x inherent risk x detection risk). The only way an auditor can keep an acceptable amount of audit risk in this situation is to decrease detection risk, meaning they will do more effective and detailed test work. Since your question does not mention anything about control risk, assume the only factors involved are inherent risk and detection risk. The auditor can only manage detection risk, not inherent or control risk. Meaning that as one rises, the auditor must increase testing (lower detection risk) to keep audit risk manageable. Hope my rambles help!

[Anonymous]

So even though the question does not mention that the audit risk stays the same, we should always assume the auditor would do what he can to make the audit risk stays on an acceptable level. Right?

[Anonymous]

^ I would agree @chrisli1217. You go in with a given acceptable level of audit risk, and adjust detection risk based on present levels of control risk and inherent risk.

[Anonymous]

Thanks a lot everyone.

[Author]

Replies