You are teaching a class of new hires at your international accounting firm. Explain the audit risk model using a mathematical formula.AR = RMM × DRAR = Audit riskRMM = Risk of material misstatementDR = Detection risk
What will be an ideal response?
Audit risk consists of:
1. The risk that the balance or class and related assertions contain misstatements that could be material to the financial statements when aggregated with misstatements in other balances or classes. These risks exist independently of the audit.
2. The risk that the auditor will not detect such misstatements (detection risk). This risk can be controlled by the auditor through the scope of the audit procedures performed.
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