The Audit Risk Model

The audit risk model shows audit risk (the risk the auditor will issue an incorrect opinion when the financial statements are materially misstated) as a function of 3 factors: (1) inherent risk, (2) control risk, and (3) detection risk. Inherent risk is the susceptibility of an account to material misstatement in the absence of internal controls; inherent risk is based on the business environment, the nature of the transactions, and the integrity of the client's management. Control risk is the likelihood that a material misstatement will not be caught by the client's internal controls. Inherent risk and control risk, taken together, are referred to as the risk of material misstatement. The risk of material misstatement (sometimes called client risk) is the risk that the financial statements will contain a material misstatement before the auditor gets involved. The auditor has no control over the risk of material misstatement, but must assess the risk of material misstatement in order to set detection risk accordingly. Detection risk is the risk that the auditor will fail to catch a material misstatement that is not caught by the client's internal controls. When the risk of material misstatement is high, the auditor should set the detection risk to a low level to ensure that audit risk remains low. The auditor reduces detection risk by conducting more substantive tests. Thus, the higher the risk of material misstatement, the more testing the auditor needs to conduct. There is therefore an inverse relationship between the risk of material misstatement and detection risk.
—
Edspira is the creation of Michael McLaughlin, an award-winning professor who went from teenage homelessness to a PhD. Edspira’s mission is to make a high-quality business education freely available to the world.
—
SUBSCRIBE FOR A FREE 53-PAGE GUIDE TO THE FINANCIAL STATEMENTS, PLUS:
• A 23-PAGE GUIDE TO MANAGERIAL ACCOUNTING
• A 44-PAGE GUIDE TO U.S. TAXATION
• A 75-PAGE GUIDE TO FINANCIAL STATEMENT ANALYSIS
• MANY MORE FREE PDF GUIDES AND SPREADSHEETS
—
SUPPORT EDSPIRA ON PATREON
—
GET CERTIFIED IN FINANCIAL STATEMENT ANALYSIS, IFRS 16, AND ASSET-LIABILITY MANAGEMENT
—
LISTEN TO THE SCHEME PODCAST
—
GET TAX TIPS ON TIKTOK
—
ACCESS INDEX OF VIDEOS
—
CONNECT WITH EDSPIRA
—
CONNECT WITH MICHAEL
—
ABOUT EDSPIRA AND ITS CREATOR

[Nott_Fifi]

my teacher spent 3 hours on this topic, and I'm still confused. You make it super clear in 7 We need more university professors like you

[Sam-wbwl]

i've read the book for 30 minutes and couldn't understand the model, so i decided to google it and found your video which explained the topic clearly in 7 minutes. thank you

[crystalquench]

I was always so confused while studying topic about Audit risks but now I am 100% clear about the relationship between RMMS and DETECTION RISK. I would like to request to upload a video about explaining Material Misstatement at a Financial Level as a whole

[lyssavlog]

In every topic in accounting that confused me, you never failed to explain it very well than my professor. THANK YOU so much! I hope you continue uploading video discussions. God bless you.

[linhhoang]

after scrolling up and down screen to read lengthy and boring materials for next class, I decided to find something more interesting and much more clear cut on Youtube and this video is such a treasure. Fully understand the topic in 7 minutes. Thanks so much

[Joe_Can]

Great video! I have been banging my head against a wall with my school readings trying to understand this and your video cleared everything up. Thanks for the help.

[jacobowino]

Now I understand audit risk even better. Thank you

[ypgziun]

Thanks you just explained my 12 weeks of classes in less than 5 mins

[ibrahimezzat]

I have benefited from your videos for many years, and I think I owe you more than saying thank you,
not only your simple way of explanation I like, but your voice tune is comfortable to hear
THANK YOU VERY MUCH FOR THIS KNOWLEDGE

[daviddavisiii]

I am about to graduate with an accounting degree in the spring and I just want to say thank you, you have been one of the best resources out there for me. Thank you so much! Youve made my life so much easier

[hazemal-thari]

The way you explain topics and how greatly are simplified is just fantastic ❤

[arad]

You're the goat man, you're the reason why I got the top mark in my accounting class lmao. Forever grateful brother.

[heshanpalliyaguruge]

This was the most clear explanation I have ever witnesses in my life. Thank you so much, I appreciate it so much.

[balarocky]

More than a year i stucked with this concept..just doing memorizing the concepts ..after get to watching this video..The concept are stick into my mind..i never gonna to forget it untill my life time

[cooperdodge]

I appreciate these videos more than you can imagine.

[FinalShotCA]

I am preparing for my interview of an auditor using your videos
Big thumps up for your teaching skills sir!

[dwaynejackson]

Thank you so much.I think this is the only video on youtube that explains it so well.

[zachooper]

Watched your videos for a long time now, you're a life saver.

[BigCPA]

Thank you always for your fabulous lecture videos.

[hasanjavaid]

Thank yu Sir, For making Audit pupils lives easier 😃