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Audit Risk
Audit Risk
Audit risk is the probability that an audit team will express an inappropriate audit
opinion when the financial statements are materially misstated (i.e., provide an
unmodified opinion on financial statements that are misleading due to material
misstatements that the auditors failed to discover). Such a risk always exists, even
when audits are well-planned and carefully performed. Naturally, the risk is
significantly higher in poorly planned and carelessly executed audits. The auditing
profession does not have an official standard for an acceptable level of overall audit
risk, except that it should be "appropriately" low.
4.2 What are the components of the risk of material misstatement (RMM)? What are the
components of audit risk model?
Audit Risk = (Inherent Risk x Control Risk) x Detection Risk
RMM = Inherent Risk x Control Risk
4.4 What is meant by the terms nature, timing, and extent of further audit procedures?
Nature – refers to the type and characteristics of audit tests, determining the specific
methods used to gather relevant and effective evidence, such as inspection,
observation, or confirmation.
Timing – involves deciding when audit tests are conducted, with auditors choosing
between interim dates or closer to the reporting period end to maximize the
effectiveness of substantive procedures.
Extent – encompasses determining the quantity or scope of audit testing, specifying
the number of items or transactions to be examined and the depth of scrutiny
applied to each, influenced by risk assessments and materiality considerations.