{"id":540,"date":"2021-04-27T01:58:42","date_gmt":"2021-04-27T01:58:42","guid":{"rendered":"https:\/\/alminawi.com\/?p=540"},"modified":"2021-04-27T01:58:42","modified_gmt":"2021-04-27T01:58:42","slug":"audit-function-episode-09-audit-risk-formula","status":"publish","type":"post","link":"https:\/\/e.americanpro.org\/?p=540","title":{"rendered":"Audit Function: Episode 09, Audit Risk Formula"},"content":{"rendered":"<p data-start=\"58\" data-end=\"482\">The audit risk model helps auditors understand and manage the risk of giving an incorrect audit opinion. The formula is: <strong data-start=\"179\" data-end=\"261\">Audit Risk (AR) = Inherent Risk (IR) \u00d7 Control Risk (CR) \u00d7 Detection Risk (DR)<\/strong>. This model allows auditors to plan how much testing is required and where to focus efforts. Audit sampling directly affects <strong data-start=\"387\" data-end=\"410\">Detection Risk (DR)<\/strong>\u2014the risk that errors or fraud will not be detected by audit procedures.<\/p>\n<p data-start=\"484\" data-end=\"886\">Consider an internal audit of the accounts payable process. Suppose the auditor estimates <strong data-start=\"574\" data-end=\"596\">Inherent Risk (IR)<\/strong> at 0.8 (80%) due to complex vendor relationships, and <strong data-start=\"651\" data-end=\"672\">Control Risk (CR)<\/strong> at 0.6 (60%) because of weak approval controls. To keep overall <strong data-start=\"737\" data-end=\"756\">Audit Risk (AR)<\/strong> at an acceptable level\u2014say 5% (0.05)\u2014the auditor must calculate the maximum acceptable <strong data-start=\"844\" data-end=\"867\">Detection Risk (DR)<\/strong> using the formula:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-medium wp-image-543\" src=\"https:\/\/americanpro.org\/wp-content\/uploads\/2021\/04\/risk-model-300x47.png\" alt=\"\" width=\"300\" height=\"47\" srcset=\"https:\/\/e.americanpro.org\/wp-content\/uploads\/2021\/04\/risk-model-300x47.png 300w, https:\/\/e.americanpro.org\/wp-content\/uploads\/2021\/04\/risk-model-350x55.png 350w, https:\/\/e.americanpro.org\/wp-content\/uploads\/2021\/04\/risk-model.png 561w\" sizes=\"auto, (max-width: 300px) 100vw, 300px\" \/><\/p>\n<p data-start=\"960\" data-end=\"1269\">This means the <strong data-start=\"975\" data-end=\"993\">Detection Risk<\/strong> must be 10.4% or lower. To achieve this, the auditor uses a larger, more carefully selected audit sample to reduce the chance of missing errors. For example, instead of reviewing 20 invoices, the auditor may increase the sample size to 50 and apply stricter testing criteria.<\/p>\n<p data-start=\"1271\" data-end=\"1487\" data-is-last-node=\"\" data-is-only-node=\"\">This numeric approach shows how audit sampling supports risk management within the audit risk model. By adjusting the extent and nature of sampling, auditors maintain low overall audit risk while working efficiently.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The audit risk model helps auditors understand and manage the risk of giving an incorrect audit opinion. The formula is: Audit Risk (AR) = Inherent Risk (IR) \u00d7 Control Risk (CR) \u00d7 Detection Risk (DR). This model allows auditors to plan how much testing is required and where to focus efforts. Audit sampling directly affects [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":1017,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[17],"tags":[],"class_list":["post-540","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-internal-audit"],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/e.americanpro.org\/wp-content\/uploads\/2021\/03\/9-e1750016248452.avif","_links":{"self":[{"href":"https:\/\/e.americanpro.org\/index.php?rest_route=\/wp\/v2\/posts\/540","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/e.americanpro.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/e.americanpro.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/e.americanpro.org\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/e.americanpro.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=540"}],"version-history":[{"count":0,"href":"https:\/\/e.americanpro.org\/index.php?rest_route=\/wp\/v2\/posts\/540\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/e.americanpro.org\/index.php?rest_route=\/wp\/v2\/media\/1017"}],"wp:attachment":[{"href":"https:\/\/e.americanpro.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=540"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/e.americanpro.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=540"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/e.americanpro.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=540"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}