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Hi,
I hope you are well.
Although I understand the definition of inherent risk, control risk, and detection risk. However, I still do not understand the relationship between them. Why when the Inherent Risk and Control risk are set at low then the Detection risk will be set at high and what will happen if the detection risk is set at a high level?
Please help me answer these questions. Thank you so much ^^
Please look at the diagram at the bottom of page 56
Errors arise (IR) -> Controls don’t detect (CR) -> Auditor doesn’t detect (DR)
Now look at the diagram at the top of page 57
If IR and CR are both 100% (i.e. as high as they could possibly be) and you want AR to be 5% (say), the auditor will have to do a lot of audit work to make DR 5%.
But now consider if although IR is still 100%, there are good controls and so the auditor assessed (though tests of controls) that control risk is halved to 50%. For AR to be 5% (as before), DR can now be higher – at 10%. This means the auditor can do less audit work.
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