[Tootsie]

According to Becker – an auditor can change the level of DR but cannot change the level of IR or CR.

So my question is – if I am an auditor and I find a material misstatement that was not corrected by the entity’s internal control (for example, I find that by reconciling an expense from the trial balance to the general ledger, that a material misstatement exists, which was not caught by the accounting manager), does this mean that I would decrease DR because CR increases?

Also, do auditors only increase/decrease DR and not the other types of risks like IR, CR, and AR? If they can increase/decrease the other types, can someone provide me an example. I am confused as to which risk to choose to increase/decrease. If I am understanding correctly, the auditor controls whether to increase/decrease DR and the client controls IR and CR.

FAR - 76
AUD - 88!!! DONE!!!!!!!!
BEC - 76
REG - 77

never, never, never give up

[msgolds]

@Tootsie, the best way to look at Detection Risk is as the level of risk that the Auditor is willing to ACCEPT based the Risk of Material Misstatement. If an entity has stronger internal controls, that decreases control risk. If you can place greater reliance on internal controls, you are willing to accept a higher detection risk, which means you are willing to do less testing. Likewise, if a company has very low inherent risk, you are willing to do less testing, and can accept higher detection risk. On the other hand, if there are weak internal controls and the company has lots of inherent risk, you would set acceptable detection risk as lower, which means you would need to do more testing. So Detection Risk is the only element the auditor has control over. Inherent risk is based on the size and nature of the client's business before any internal controls have been implemented, and control risk is the controls that the client has put in place to mitigate the inherent risk.

Let me give you an example from my own audit experience. Recently I was assigned to perform an Audit at an extremely small company. The company had very few transaction and sales during the year, so they had incredibly low inherent risk. As a result,we were able to set my acceptable detection risk at a pretty high level and do a smaller amount of substantive.

BEC - 90 PASSED
FAR - 84 PASSED
AUD - 93 PASSED
REG - 84 PASSED

I DID IT!!!!

Using Becker Self-Study

"If we were put here to carry a great weight, then the very things we hate are here to build those muscles."

[Tootsie]

@msgolds, thanks for the examples! This really helps! Also, the fact that I know now that auditors can only control DR is good. I was so confused!

Any other examples from folks are appreciated too!

FAR - 76
AUD - 88!!! DONE!!!!!!!!
BEC - 76
REG - 77

never, never, never give up

[Author]

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