Final answer:
The audit risk model consists of three steps: identify risks, assess risks, and respond to risks. It helps auditors assess the risk of material misstatements in financial statements.
Step-by-step explanation:
The audit risk model is a tool used by auditors to assess the risk of material misstatements in financial statements. It consists of three steps:
Identify Risks: In this step, auditors identify the potential risks that may result in material misstatements. This includes assessing the internal controls, financial reporting process, and the industry and economic factors affecting the company.
Assess Risks: Once the risks are identified, auditors assess the likelihood and potential impact of these risks on the financial statements. This involves determining the inherent risk, control risk, and detection risk.
Respond to Risks: Based on the assessment of risks, auditors develop appropriate audit procedures to address the identified risks. This may include testing controls, performing substantive procedures, and obtaining sufficient and appropriate audit evidence.
The audit risk model helps auditors to plan and execute an effective and efficient audit, ensuring the reliability of financial statements.