inherent risk and control risk are directly related

The correct answer is: Inherent risk is inversely related to planned detection risk and directly related to planned evidence. ... Since detection risk is the probability that a misstatement will not be discovered by the auditor, as detection risk decreases, the planned audit evidence required will decrease.

1. What is the relationship between inherent risk and control risk?
2. What is inherent risk in risk management?
3. How do inherent risk and control risk differ from detection risk?
4. What is a control risk?
5. How can you avoid inherent risk?
6. What is an example of inherent risk?
7. How do you explain inherent risk?
8. How do you calculate inherent risk?
9. What factors influence inherent risk?
10. How do you control detection risk?

What is the relationship between inherent risk and control risk?

The inherent risk stems from the nature of the business transaction or operation without the implementation of internal controls to mitigate the risk. Control risk arises because an organization doesn't have adequate internal controls in place to prevent and detect fraud and error.

What is inherent risk in risk management?

Inherent Risk is typically defined as the level of risk in place in order to achieve an entity's objectives and before actions are taken to alter the risk's impact or likelihood. Residual Risk is the remaining level of risk following the development and implementation of the entity's response.

How do inherent risk and control risk differ from detection risk?

Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk relates to the auditor's procedures and can be changed at his or her discretion.

What is a control risk?

Control risk, which is the risk that a misstatement due to error or fraud that could occur in an assertion and that could be material, individually or in combination with other misstatements, will not be prevented or detected on a timely basis by the company's internal control.

How can you avoid inherent risk?

Normally, detection risk is countered by increasing the number of sampled transactions during testing. Inherent risk: Considered the most pernicious of the major audit risk components, inherent risk can't be easily avoided through increased auditor training or creating controls in the auditing process.

What is an example of inherent risk?

Examples of Inherent Risk Factors

For example, financial transactions that require complex calculations are inherently more likely to be misstated than simple calculations. Cash on hand is by nature more susceptible to theft than a large inventory of coal.

How do you explain inherent risk?

Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex, or in situations that require a high degree of judgment in regard to financial estimates.

How do you calculate inherent risk?

Calculate the inherent risk factor. Multiply the business impact score and the threat landscape score; then divide by 5. The resulting number is the plan's inherent risk level.

What factors influence inherent risk?

Factors affecting account inherent risk include:

• Dollar size of the account.
• Liquidity.
• Volume of transactions.
• Complexity of the transactions.
• New accounting pronouncements.
• Subjective estimates.

How do you control detection risk?

The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. Examples of the tests that may be conducted are classification testing, completeness testing, occurrence testing, and valuation testing.