[Anonymous]

Hi.

I understand what situation would increase or decrease audit risk, for example, rapid growth of the company, change from using unacceptable principle to GAAP. I know they increase the audit risk.

I know they increase the audit risk, but what about audit risk and detection risk? Sometimes the problem asks if such, such situation increase or decrease the inherent risk or increase detection risk? What determinants the increase or decrease of these two risks? Thanks a lot

[Anonymous]

Remember that the only risk that the auditor can control is Detection Risk. If the audit risk amount is predetermined, then the DR will need to be adjusted depending on whatever CR & IR amount to, to keep AR at the desired level.

AR = DR x CR x IR

If IR increases AR, adjust the DR to bring the AR back down to an acceptable level.

[Gusher_hi]

If there are questions asking whether certain situation increase or decrease the inherent risk and detection risk, just think about the relationship between control and inherent risks with the detection risk which is inverse.

Therefore if the situation indicates that control or inherisk risk is high, that means that the acceptable level of detection risk is low.

[thechapman]

You raise/lower detection risk to achieve the desired level of audit risk. If an answer choice mentions the AUDITOR changing inherent risk (or control risk, for that matter), you can immediately rule that answer choice out.

Passed - 2014

[kahtwoloo]

Inherent risk doesn't change. After the auditor assesses internal control control risk is assessed which, in turn, restricts detection risk.

For example say an auditor determines that a control is NOT working properly. Control risk would be set to high. This means it would unacceptable to NOT to be able to detect that risk. In other words, (acceptable) detection risk decreases. The auditor SHOULD be able to detect a control that isn't working. The also causes the audit risk to decrease because the auditor should detect any misstatements related to that control.

Thus we have and inverse relationship between DR and CR. We also have direct relationship to AR and DR. Inherent risk doesn't change and the auditor can't control it.

BEC-51,71,70,77
AUD-50,62,68 (retake july)
REG-55
FAR-15(didnt study)

[Author]

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