Auditing Chapter 4 Class Notes

2/17/25 ACCT 4290 – Auditing Smith



Chapter 4
Learning objectives 1-3; PowerPoint slides 1-8


Audit Risk – risk that the auditor will give the wrong opinion
 Why is this important:
o Protects stockholders interests
o Integrity of audit process
o Maintains credibility of auditing profession
Audit risk model:
 Inherent Risk: Susceptibility of an assertion about a class of
transaction, account balance, or disclosure to a misstatement due to
error or fraud that could be material, before consideration of an related
controls
 Control risk: Risk that a misstatement that could occur in an assertion
about a class of transaction, account balance, or disclosure and that
could be material will not be prevented, or detected and corrected, on
a timely basis by the entity’s internal control.


Inherent risk and control (CLIENT RESPONSIBILITY): Risk of Material
Misstatement
Audit Risk = (IR * CR) * DR
Or
Audit Risk = RMM * DR
 Detection risk (AUDITOR RESPONSIBILITY): Risk that the
procedure preformed by the auditor to reduce audit risk to an
acceptable low level will not detect misstatements that exist and could
be material
o Sampling: Restricted to a sample not entire population
o Non-sampling: Occurs because of the auditor’s use of an
appropriate audit procedure or misinterpretation of results
Using the Audit Risk Model:
1. Setting a planned level of audit risk
2. Assessing the risk of material misstatement (IR * CR)
3. Determining the appropriate level of detection risk
AR = IR * CR * DR