Page 15 - Auditinf Electronic System

B- Audit Risk Components:
❖ Audit Risk (AR) = Inherent risk (IR) X Control Risk (CR) X Detection risk

(DR)

Inherent Risk:
❖ It’s the susceptibility a class of transaction, account balance or disclosure to

be misstated is associated with the unique characteristics of the industry
of the client.

❖ Industries that have a heavy volume of cash transactions Or Selling Products
that are hardly valuates as diamonds, will have a higher level of inherent risk
than those that do not.

Control risk:
❖ is the likelihood that the internal control structure is inadequate to prevent

or detect material misstatements in the transactions, accounts balance or
disclosure.

❖ Auditors assess the level of control risk by performing tests of internal
controls, as creating test transactions by auditor and make sure they are
properly posted

Detection risk:
❖ Is the likelihood that auditor`s substantive audit procedures fail to detect

material misstatements the transactions, accounts balance or disclosure.

❖ It’s determined as the complementary of IR &CR if they are high the auditor
must reduce the detection risk to reach the acceptable audit risk. Which means
he needs to reduce the probability of not finding misstatements in financial
statements. So, he will have to increase the level; and extent and nature of his
procedures.

Example on Audit Risk Model:
The audit risk model is AR = IR × CR × DR

Assume that acceptable audit risk is assessed at a value of 5 percent, consistent with
the IR is assessed at 40 percent, and CR is assessed at 60 percent.

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‫جميع الحقوق محفوظة ـ الإعتداء على حق المؤلف بالنسخ أو الطباعة يعرض فاعله للمسائلة القانونية‬