Helpful Information:
Audit risk model:
PDR = AAR/IR*CR
PDR = planned detection risk
AAR = acceptable audit risk
IR = inherent risk
CR = control risk
Problem:
Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit inventory.
Situation:
Risk 1 2 3 4 5 6
Acceptable audit risk high high low low high medium
Inherent risk low high high low medium medium
Control risk low low high high medium medium
Planned detection risk ----- ----- ----- ----- ----- -----
Planned evidence ----- ----- ----- ----- ----- -----
a) Explain what low, medium, and high mean for each of the four risks and planned evidence.
b) Fill in the blanks for planned detection risk and planned evidence using the terms low, medium, or high
c) Using your knowledge of the relationships among the foregoing factors, state the effect on planned evidence (increase or decrease) of changing each of the following five factors, while the other three remain constant:
(1) An increase in acceptable audit risk
(2) An increase in control risk
(3) An increase in planned detection risk
(4) An increase in inherent risk
(5) An increase in inherent risk and a decrease in control risk of the same amount