Question

What are the relationships between each of the elements in the Audit Risk Model (inverse relationship, positive relationship, effect on amount of work the auditor must do, if one goes up how does that influence the other variables, etc.)?

AR = IR X CR X DR or AR = RMM X DR

Answer 1

In the Audit Risk Model, there is a positive relationship between Audit Risk and Inherent Risk & Control Risk, and an inverse relationship between Audit Risk and Detection Risk.

Step-by-step explanation:

In the Audit Risk Model, the relationships between each of the elements are as follows:

• AR (Audit Risk) = IR (Inherent Risk) x CR (Control Risk) x DR (Detection Risk)
• There is a positive relationship between AR and IR, meaning that if the level of Inherent Risk increases, Audit Risk also increases.
• There is a positive relationship between AR and CR, which means that as Control Risk increases, Audit Risk also increases.
• There is an inverse relationship between AR and DR, indicating that as Detection Risk increases, Audit Risk decreases.
• Similarly, in the alternative formulation of the model where AR = RMM (Risk of Material Misstatement) x DR, there is a positive relationship between AR and RMM, and an inverse relationship between AR and DR.