LO 2, 3 A staff auditor was listening to a conversation between two senior auditors regarding the audit risk model. The following are some statements made in that conversation regarding the audit risk model. State whether you agree or disagree with each of the statements and explain why.

Audit risk should be set at zero for most audit engagements.

Inherent risk may be very low for certain assertions for some accounts. One example might be the completeness assertion for payroll expenses at Wal Mart. In such cases, the auditor does not need to perform direct tests of the assertion/account balance if the auditor obtains assurance that the inherent risk is indeed that low and that internal controls, as designed, are effective, and are working appropriately.

Control risk refers to both: (a) the design of controls, and (b) the operation of controls. To assess control risk as low, the auditor must gather evidence on both the design and operation of controls.

Detection risk at 50% implies that the substantive tests have a 50% chance of not detecting a material misstatement and that the auditor is relying on client characteristics (inherent and control risk) to address the additional uncertainty regarding the possibility of a material misstatement.

Audit risk should vary inversely with both inherent risk and control risk; the higher the risk of material misstatement, the lower should be the audit risk taken.

In analyzing the audit risk model, it is important to understand that much of it is judgmental. For example, setting audit risk is judgmental, and assessing inherent and control risk is judgmental.