AAudit Risks for Particular Accounts Can Be Expressed in the Model

question 110

Essay

A.Audit risks for particular accounts can be expressed in the model: Audit risk (AR)= Inherent risk (IR)x Internal control risk (CR)x Detection risk (DR).If an audit risk is set at 5 percent,the inherent risk at 80 percent,and the internal control risk at 25 percent,what would be the detection risk?
A. Detection risk =.05/(.80 X .25) = .25
B. .01/(.80 X .25) =.05
B. If the audit team wanted to reduce the audit risk to 1 percent, what would be the detection risk?
C. The audit team would have to increase the amount and effectiveness of evidence gathered from substantive procedures.
C. What would the audit team have to do to reduce the audit risk?

---

Definitions:

Balance Sheet

a financial statement that provides a snapshot of a company's financial position at a particular point in time, detailing assets, liabilities, and equity.

Income Statement

A report detailing income and outgoings of a business for a set time frame, culminating in a profit or deficit.

Times Interest Earned

A financial ratio that measures a company's ability to meet its interest payments on outstanding debt from its operating earnings.

Common Stock

A type of equity security that represents ownership in a corporation, giving holders voting rights and a share in the company's profits via dividends.