Learning Objectives. Illustrate risk model Determine level of OAA Identify risks Calculate detection risk. Session Overview. Purpose of identifying and assessing risk Components Factors influencing risk Risk model How to assess risk. Inherent Risk.
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Inherent risk is defined as the risk that in the absence of preventive internal accounting controls, a material error will occur in the accounting process.
The risk of material error occurring in the first place
Control risk is the risk that error that has occurred in the component and that could be material, when aggregated with errors in other components, will not be detected on a timely basis by the internal controls in place.
Detection risk is the risk that the auditor’s procedures will not detect error that exists in the component and that could be material when aggregated with error in other components.
Overall audit risk is the maximum risk that the auditor is prepared to assume that error in the financial statements aggregating to more than materiality will remain undetected at the end of the audit.
OAR= IR x CR x DR
OAR= Overall Audit Risk
IR= Inherent Risk
CR = Internal Control Risk
DR = Detection Risk
OAR = IR x CR x DR
DR = OAR X
CR x IR
OAR = 1- ASSURANCE LEVEL
DST - Detailed Substantive
SBA - Systems Based
(I.e. CR + IR)
Assessment of control risk
1.Starting point is to set the level of overall audit risk;
2.Assess the component risks starting with inherent risk then control risk;
3.Rearrange model and solve DR
95 % : Most common level
97 % : Few sensitive entities
99 % : Extremely sensitive cases
Quality of accounting personnel
Number of adjustments
Significance of adjustments
Mix of population
Susceptibility to misappropriation
Factors to Consider WhenAssessing Inherent Risk
Carried out by
staff of appropriate
Strength of Control
Effectiveness of I.C.
Control objective is met
Factors to Consider When Assessing Control Risk