Audit Risk Model- Example 1

You are assigned to conduct the audit procedures for the inventory account at Tech Toys, a public company in the technology industry that sells the latest technology for fitness watches. Inventory obsolescence and the products susceptibility to theft is a business risk that management has identified for its inventory. As part of your procedures you have to evaluate the overall risk assessment for the inventory account using the audit risk model. Your team has decided that the acceptable level of overall audit risk for this account is Very Low or Low.

You perform a walkthrough of Tech Toys process for its inventory, which includes internal controls surrounding the existence, completeness, and valuation of inventory. Based on your walkthrough and test of control procedures, you find that Tech Toys has inadequate internal controls in place surrounding its inventory processes.

Given the above, what is the assigned level of risk (low, moderate, or high) for each of the components of the audit risk model that will enable a Very Low or Low level of audit risk for the inventory account? Briefly describe your judgment regarding the level of risk for each component. What does your assessment for each of the components of the Audit Risk Model indicate about the nature, timing, and extent of substantive procedures that will be performed?

Audit Risk Model- Example 2

Assume instead that based on your walkthrough and test of control procedures, you find that Tech Toys has adequate internal controls in place surrounding its inventory processes. How does this change your assessment?