[mdcpa89]

I just cannot understand the factors that affect control, inherent or detection risk. I know what they are and I understand the concept but when there is a question like “The firm hired a new accounting director” what is the effect on control, inherent or detection risk? I just go completely blank.

I have failed audit twice,

[jenpen]

I am in the EXACT same boat as you, my friend. I feel your pain. I understand the risks in theory, but put them in motion and I feel so confused.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[WaitingonScoreRelease]

mdcpa89,

The first thing I like to think of when I approach these questions is I think of what is the definition of each of these categories of risk.

What is Inherent Risk?

What is Control Risk?

What is Detection Risk?

Then I think, what does the prompt of the question does this most likely fit into? It's not always clear-cut, but I can usually get most of them right from there.

Good luck!

Aud: 99. (May)
Bec: 89. (April)
Far: 84. (Feb)
Reg: 79. (July)

[Anonymous]

I was confused about that too at beginning. I try to think it in an easy way.

Inherent risk: the risk comes with the incident, not from managers and auditors' failure of control. For example, the company just bought derivatives. Derivatives is considered a high risk investment, so the inherent risk goes up. If the company sold all derivatives, the inherent risk reduced. It doesn't matter how managers react to it, it doesn't change the fact that derivatives come with a risk.

Control risk: I think about things managers/company do to change the control. Hiring a qualified financial manager is a good control for company's financial management, so it lowers control risk. Misstatements/other control mistakes show high control risk.

Detection risk: is the only risk that auditors can change. For example, do more detail sample testing is reducing detection risk.

[SurfNY]

Don't forget the inverse relationship between ( IR, CR ) and DR

If CR is high DR is low = increase substantive testing (please correct me if wrong)

Also remember this does not apply to Audit Risk for financial statements taken as a whole.

This is my approach for audit risk at anything other than FS as a whole

IR – nature of transaction only (risky or not, chance of mms?- depends on complexity)

CR – internal control (how effective)

DR – depends on the assessment of the other 2 risks (inverse relationship)

REG - 82 05/26/15
FAR - 80 07/01/15
AUD - 82 08/31/15
BEC - .. 10/26/15

[Anonymous]

@cleverfairy I wasn't having trouble with IR/Cr/DR particularly but thought your explanations/ examples were really great! 🙂

[Author]

Replies