Question

The relationship between audit risk (AR), inherent risk (IR), control risk (CR), and detection risk (DR) may be best expressed by:

A. AR = IR + CR - DR.
B. DR = AR × IR × CR.
C. AR = IR - CR - DR.
D. AR = IR × CR × DR.

Answer 1

The relationship between audit risk, inherent risk, control risk, and detection risk is best expressed by option A: AR = IR + CR - DR. Option A

Step-by-step explanation:

The relationship between audit risk (AR), inherent risk (IR), control risk (CR), and detection risk (DR) is best expressed by option A: AR = IR + CR - DR.

Audit risk represents the risk that an auditor may unknowingly fail to modify their opinion on financial statements that are materially misstated.

Inherent risk refers to the susceptibility of the financial statements to material misstatement, while control risk is the risk that a material misstatement will not be prevented or detected by the internal controls. Detection risk is the risk that the auditor's procedures will fail to detect a material misstatement.

By adding inherent risk to control risk and then subtracting detection risk, we can calculate the overall audit risk. This formula helps auditors assess the level of risk involved and plan their audit procedures accordingly. Option A