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How is audit risk impacted with changes in the assessment of inherent risk, control risk, and detection risk?

Audit risk is the combination of inherent risk, control risk, and detection risk. Remember, the audit team will “assess” inherent risk and control risk. Based on the assessment, then audit team will set detection risk, which ultimately impacts the amount of substantive procedures that must be performed.

So in the visual below, you can see what types of situations would increase inherent risk and control risk. If inherent risk and control risk are assessed at high, then the risk of material misstatement would be assessed at high.

Since the audit team sets detection risk, and detection risk is inversely related to RMM, then the audit team would set detection risk at low. That means that the audit team must perform substantive procedures that provider better evidence and potentially more substantive procedures.


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