Evaluation of Comptronix Corporation: Identifying Inherent Risk and Control Risk Factors
1. Professional auditing standards present the audit risk model, which is used to determine the nature, timing, and extent of audit procedures. Describe the components of the model and discuss how changes in each component affect the auditor’s need for evidence.
The audit risk model is used to determine the nature, timing, and extent of substantive audit procedures. The components of audit risk model usually stated as follows:
DR = AR/(IR x CR)
Where: DR = detection risk; AR = audit risk; IR = inherent risk; CR = control risk
Detection Risk: auditors’ procedures will lead them to conclude that a financial statement assertion is not materially misstated when in fact such misstatement does exist. If auditors want to decrease DR, they had better collect more evidence and make sure the validity of evidence.
Audit Risk: auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. If AR should be keep in low level, which means the other risks also should be low.
Inherent Risk: The risk of material misstatement of a financial statement assertion, assuming there were no related controls. As inherent risk increases, PDR decreases, which in turn increases the auditor’s need for stronger evidence.
Control risk: The risk that a material misstatement that could occur in an account will not be prevented or detected on a timely basis by internal control. If the strength of internal control is assessed as decreasing, the auditor should pay more attention to control risks.
2. One of the components of the audit risk model is inherent risk. Describe typical factors that auditors evaluate when assessing inherent risk. With the benefit of hindsight, what inherent risk factors were present during the audits of the 1989 through 1992 Comptronix financial statements?
Inherent risk is a measure of the auditor’s assessment of the susceptibility of an assertion to a material misstatement assuming there are no related internal
The audit risk model is used to determine the nature, timing, and extent of substantive audit procedures. The components of audit risk model usually stated as follows:
DR = AR/(IR x CR)
Where: DR = detection risk; AR = audit risk; IR = inherent risk; CR = control risk
Detection Risk: auditors’ procedures will lead them to conclude that a financial statement assertion is not materially misstated when in fact such misstatement does exist. If auditors want to decrease DR, they had better collect more evidence and make sure the validity of evidence.
Audit Risk: auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. If AR should be keep in low level, which means the other risks also should be low.
Inherent Risk: The risk of material misstatement of a financial statement assertion, assuming there were no related controls. As inherent risk increases, PDR decreases, which in turn increases the auditor’s need for stronger evidence.
Control risk: The risk that a material misstatement that could occur in an account will not be prevented or detected on a timely basis by internal control. If the strength of internal control is assessed as decreasing, the auditor should pay more attention to control risks.
2. One of the components of the audit risk model is inherent risk. Describe typical factors that auditors evaluate when assessing inherent risk. With the benefit of hindsight, what inherent risk factors were present during the audits of the 1989 through 1992 Comptronix financial statements?
Inherent risk is a measure of the auditor’s assessment of the susceptibility of an assertion to a material misstatement assuming there are no related internal