HAS AUDIT RISK MODEL LIMITATIONS ?

[aahan786]

Respected Auditors and Accountants

Assalam a Alaikum

the audit risk model is normally given as

AR = IR x CR x DR

where AR is total audit risk
CR is control risk
IR is Inherent risk
DR is detection risk

I just wanted to ask if it has any limitations regarding its operation where it allows the auditor to set quantitative values on Inherent Risk and Control Risk so as to allow for an increased amount of Detection Risk and hence a lower level of substantive testing and vice versa.

(I'd later explain it numerically if necessary.But first please confirm about its limitations if any?)

thanking you

Ashfaque Shiskin Hunzawi.

[kris]

Mr. Hunzawi,
This module is basically an assisting tool for an auditor. As a matter of fact inherent risk can not be quantified instead it is part and parcel of internal control risk. Quantifying internal control risk the best tool which auditors normally use is attribute sampling. If errors are less then expected or tolerated then auditor set internal control risk less then maximum and will do less substantive testing as (s)he can tolerate more detection risk. If control risk is set at less then maximum it is possible that audit may do more test like inquire, non quantitative analytical procedures etc. to make sure the risk assume is less then maximum – hence it will guide the auditor to efficiently and effectively achieve his/her audit objective. May be my view will help you a little bit.
Bye and take good care.


kris