In Practice, Auditors Rarely Assign Numerical Probabilities to Inherent Risk

question 10

Short Answer

In practice, auditors rarely assign numerical probabilities to inherent risk, control risk, or acceptable audit risk. It is more common to assess these risks as high, medium, or low. For each of the four situations below, fill in the blanks for planned detection risk and the amount of evidence you would plan to gather ("planned evidence") using the terms high, medium, or low.

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Definitions:

Cash Flow

The total amount of money being transferred into and out of a business, affecting the company's liquidity.

Project

A project is a temporary endeavor designed to produce a unique product, service, or result, typically with defined goals and constraints.

Mutually Exclusive

Situations or choices where the selection of one option precludes the selection of another, often used in decision-making processes.

Crossover Rate

The point at which two projects have the same net present values and discounted cash flows, used in assessing investment options.