Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial

statements are materially misstated. The auditor considers audit risk when planning and

performing an examination of financial statements in accordance with auditing standards. In

connection with this, the auditor considers the relevant assertion level because this directly

assists the auditor to plan the appropriate audit procedures for those transactions, accounts or

disclosures. The auditor uses the audit risk model as a framework for assessing audit risk and

to determine the nature, extent and timing (that is the level of audit procedures to be performed)

that should be performed in order to reduce the audit risk to an acceptable low level.

The statutory financial statements of Almighty Limited have been audited by CPA & Co for a

few years. In implementing the ARM, the quantitative approach has been used by the auditor Page 3 of 4

and the components of the audit risk identified and determined at the current years planning

stage are as follows:

Internal control risk 60%

Inherent risk 60%

Audit risk 10%

Detection risk 28%

Required:

(a) Inherent risk, control risk and detection risk are the components of audit risk. Explain

how these components are interrelated.

(5 marks)

(b) During the course of the current years audit, the auditor noted some changes in

circumstances that require a reassessment of the nature, extent and timing of the audit.

In this connection, the auditor noted that the inherent risk should be revised to 70%

whilst the internal control risk as reassessed should be 80%.

(i) What do you think would be the impact of these changes to the detection risk if

the auditor wants to maintain the audit risk at the same level?

(8 marks)

(ii) What does it mean to the level of audit procedures to be performed as a result

of the above reassessment?

Explain your answers for (i) and (ii) above.