What is the acceptable level of detection risk?

What is the acceptable level of detection risk?

Acceptable Audit RiskInherent RiskAudit Procedures / Evidence RequiredHighLowLowMediumMediumMediumLowLowMediumLowHighHigh

What is detection risk affected by?

Detection risk is affected by (1) the effectiveness of the substantive procedures and (2) their application by the auditor, i.e., whether the procedures were performed with due professional care.

What is the relationship between inherent risk and detection risk?

Detection risk. This risk is caused by the failure of the auditor to discover a material misstatement in the financial statements. Inherent risk. This risk is caused by an error or omission arising from factors other than control failures

What are the two components of detection risk?

Detection risk is linked up with the other links i.e. The business risk, material misstatement risk and its two components which are the control risk and the inherent risk

Is it better to have high or low detection risk?

Detection Risk and quality of audit have an inverse relationship: if detection risk is high, lower the quality of audit and if detection risk is low, generally increase the quality of audit.

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How is detection risk calculated?

AR IR xd7 CR xd7 DR.Audit risk

  • Inherent risk (IR), the risk involved in the nature of business or transaction.
  • Control risk (CR), the risk that a misstatement may not be prevented or detected and corrected due to weakness in the entity’s internal control mechanism.
  • How is detection risk determined in auditing?

    Detection risk occurs when you don’t use the right audit procedures or you don’t use them correctly. You assess inherent and control risk and then solve your audit risk equation by assigning detection risk to reduce your audit risk to an acceptable level.

    What do you mean by detection risk?

    Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. ‘

    What effect that assessment will have on detection risk?

    Detection risk has an inverse relationship with the assessed risk of material misstatements (Inherent risk X control risk). Therefore, if risk of material misstatement is high, then detection risk would be set to high.

    How can detection risk be reduced?

    Detection risk is linked up with the other links i.e. The business risk, material misstatement risk and its two components which are the control risk and the inherent risk

    Is inherent risk directly related to detection risk?

    The correct answer is: Inherent risk is inversely related to planned detection risk and directly related to planned evidence. Because the more the inherent risk is get high, the more the evidence the auditor need to check in order to mitigate the impact of inherent risk.

    How is inherent risk related to planned detection risk?

    A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.

    What is the relationship between audit risk and detection risk?

    Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

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    What is the usual relationship between control risk and detection risk?

    There is an inverse relationship between detection risks and the combined level of inherent and control risks. Thus when inherent and control risks are high, acceptable detection risk should be low to reduce the audit risk to an acceptably low level.

    What are the two components of audit risk?

    Audit risk is a function of the risks of material misstatement and detection risk’. Hence, audit risk is made up of two components risks of material misstatement and detection risk. Risk of material misstatement is defined as ‘the risk that the financial statements are materially misstated prior to audit.

    What is detection risk?

    What Is Detection Risk? Detection risk is the chance that an auditor will fail to find material misstatements that exist in an entity’s financial statements. These misstatements may be due to either fraud or error.

    What are the components of engagement risk?

    Detection risk occurs when you don’t use the right audit procedures or you don’t use them correctly. You assess inherent and control risk and then solve your audit risk equation by assigning detection risk to reduce your audit risk to an acceptable level.

    What happens when detection risk is low?

    When detection risk is set at low, then that means that risk of material misstatement was assessed to be high. Since detection risk is set at low, that means that the audit team will have to perform a HIGHER amount of substantive testing in order to reduce the risk of not detecting a material misstatement.

    Is Low Control risk good?

    If the risk level is too high, the auditor conducts additional procedures to reduce the risk to an acceptable level. Conversely, when control risk and inherent risk are considered to be low, it is safe for the auditor to reduce the sample size for auditing testing, which increases detection risk.

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    What is meant by detection risk?

    Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

    How do we lower detection risk?

    The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. Examples of the tests that may be conducted are classification testing, completeness testing, occurrence testing, and valuation testing.

    What does it mean when detection risk is high?

    Detection risk occurs when you don’t use the right audit procedures or you don’t use them correctly. You assess inherent and control risk and then solve your audit risk equation by assigning detection risk to reduce your audit risk to an acceptable level.

    Who determines detection risk?

    AR IR xd7 CR xd7 DR.Audit risk

  • Inherent risk (IR), the risk involved in the nature of business or transaction.
  • Control risk (CR), the risk that a misstatement may not be prevented or detected and corrected due to weakness in the entity’s internal control mechanism.
  • What is detection audit risk?

    The auditor uses the assessed risk of material misstatement to determine the appropriate level of detection risk for a financial statement assertion. The higher the risk of material misstatement, the lower the level of detection risk needs to be in order to reduce audit risk to an appropriately low level. 11.

    What is detection in risk assessment?

    Detectability is often defined as the ability to detect a failure before it causes harm. The purpose of considering detection in any scenario is to ensure that potential or actual failures can be identified with enough time to take action before the user is adversely affected.

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