Audit risks for particular accounts and disclosures can be conceptualized in a model such that
Audit risk (AR) = Inherent risk (IR) x Internal control risk (CR) x Detection risk (DR). Using this
audit risk model as a framework and decide whether the auditor’s conclusion in each of the
independent situations below is appropriate.
a. Wendy, a CPA, has participated in the audit of a listed company, Forrest Ltd. for the past
five years. At the start, she worked as an audit trainee for the job; for the past two years,
she was the supervisor in charge. In her experience, she has never seen an audit adjustment
to be put through to the financial statements prepared by the client. Wendy was the manager
in charge of this job for the current year and she believed that the inherent risk must be
zero.
b. Alex, a CPA, has just completed a thorough evaluation and testing of the internal controls
of an audit client, Carmen Ltd. up to 30 November 2022. Due to the fact that not a single
error was found during his review and testing of the internal controls, Alex concluded that
the control risk should be zero. Carmen Ltd. has its financial year ending on 31 December.
 

c. Serena, a CPA, was assigned to audit a medium sized fashion retailing company, Connie
Ltd. Serena claimed that when control risk is high, detection risk is also high given the
audit risk and inherent risk remain constant. Do you agree? Explain your answers (Instead
of providing mathematical reasons, it is important to offer the intuition behind a concept

Answer rating: 100% (QA)

a Wendys conclusion that the inherent risk must be zero because she has never seen an audit adjustme... View the full answer