A staff auditor was listening to a conversation between 2 senior auditors regarding the audit risk model. The following are some statements made in that conversation regarding the audit risk model.

a.Inherent risk may be very small from some accounts (e.g. the recording of sales transactions of SM, Inc.) In fact, some inherent risks may be close to 0.01%. IN such cases, the auditor does not need to perform direct tests of account balances if he or she can be assured that inherent risk is indeed that low and that internal controls, as designed, are working appropriately.

b.Audit risk should vary inversely with engagement risk. The higher the risk with being associated with the client, the lower should be the audit risk taken.

c.In analyzing the audit risk model, it is important to understand that much of it is judgmental. For example, setting audit risk is judgmental, setting inherent and control risk is judgmental, and setting detection risk is simple a matter of the individual risk preferences of the auditor.

Required: Discuss whether you agree or disagree with each of the statements.