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I have a multiple choice question on audit risk that needs clarification. My lecturer as well has ask for clarity on this question.
Which is True regarding AUDIT RISK?
1. Audit risk is made up of inherent risk and detection risk.
2. Detection risk includes sampling risk.
3. The auditor can minimize detection risk by increasing the sample size.A 1 only
B 2 & 3 only
C 1 & 3 only
D 1,2 & 3The problem is which option is the correct option. Is it option B or D. Please shed some light on this. My Lecturer is also awaiting a response. Thanks much.
i think ans is B and i will also want to know something about audit risk !! sir help us !!
Audit risk = inherent x control x detection. Therefore 1 is false so A, C, D are false so B must be the only answer you can choose. I’m assuming that the question isn’t trying to say simply that IR and DR are components of of AR.
Detection risk does include sample risk because larger samples will reduce detection risk,
For 3 I would prefer “The auditor can reduce detection risk by increasing sample size”. Non-sampling risk also contributes to detection risk, so even if the sample were 100%, an inexperienced (or stupid) auditor might still not detect problems.
It is a very poor question eg 2 and 3 are connected.
Thank you very much sir . I made the choice of B but there was a class debate on option D so thank you very much for your reply.
How does pressure to perform affect inherent risk? Not clear on the reason please assist!
So, pressure to perform means you are under pressure to show better profits. Therefore, for example, it can lead to overly-optimistic valuation of inventory or receivables or taking profit on long-term contracts. This is an example of inherent risk ie a misstatement occurs in the first place.
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