Risk and materiality
The Audit Risk Model
Audit risk equals inherent times control times detection risk, and the auditor only steers detection risk.
How the exam words it
- -The stem gives inherent, control, or audit risk percentages and asks you to solve for detection risk.
- -It asks which risk component the auditor controls.
- -It revises control risk up or down and asks the effect on detection risk and sample size.
- -It asks how assessed risk drives the extent of testing.
The playbook
- 1Solve detection risk = audit risk divided by (inherent risk times control risk), holding audit risk fixed.
- 2The auditor controls only detection risk, inherent and control risk are the client's.
- 3Lower assessed risk allows higher detection risk and less testing, higher risk demands more.
The trap
Getting the inverse backwards. Higher assessed risk means more substantive work, not less, and only detection risk is controllable.
How the exam varies it
The same pattern, re-skinned along these axes:
Solve for detection risk versus interpret a changeRevise control risk up or downEffect on detection risk versus effect on sample size
Drill this pattern
8 questions of The Audit Risk Model from across the AUD topics. Clear it by getting 5 right with a streak of 3.