Question: Your audit firm uses the Audit Risk Model to plan

Your audit firm uses the Audit Risk Model to plan detection risk and audit procedures for tests of details. The audit you are working on is a high profile client. Therefore, for risk assessment and planning your firm uses an audit risk of 3% for this engagement. In assessing the receivable accounts, you decide that an inherent risk of 50% is appropriate. Your history with the company indicates that its ICFR is good, and there have been no problems with ICFR for accounts receivable in the past. You set control risk at 20%. You plan to perform analytical procedures, but there have been changes both in the overall economy and the company’s credit policies and price structure, so you don’t think you can rely on trends to provide you with much assurance. You use an AP risk of 80%.

Using the Audit Risk Model, what is your planned detection risk for tests of details for Accounts Receivable?
What do the various risk estimates mean?
Are the risk estimates used reasonable?
What does this planned detection risk for Accounts Receivable test of details mean for your audit tests?

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  • CreatedJanuary 21, 2015
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