- Functions of the Client and its environment
Audit Risk = RMM * Detection Risk
RMM & DR has an inverse relationship:
- RMM high (bad), DR low, substantive tests high, (control risk increase)
- RMM low (good), DR high, substantive tests low
Terms defined:
- Audit Risk - risk of failing to discover material misstatement
- Inherent Risk - risk that material misstatement will actually occur in the accounting system before consideration of internal controls
- Control Risk - risk that material misstatement (once occurred) will fail to be caught by internal control policies and procedures of the company
- assessed in terms of financial statement assertions
- important to assess as it affects the level of detection risk that auditor may accept
- Detection Risk - risk that auditor will fail to detect misstatement with audit procedures
- controlled by auditor
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