An auditor uses the Audit Risk Model (AR = IR x CR x DR) to plan the audit. If the auditor assesses Inherent Risk (IR) as High and Control Risk (CR) as High, how must the auditor manipulate Detection Risk (DR) to maintain a low overall Audit Risk?

Answer options:

Set Detection Risk to High and decrease the extent of substantive procedures.

Set Detection Risk to Low and increase the extent of substantive procedures.

Set Detection Risk to Low and rely primarily on tests of controls.

Set Detection Risk to High and rely on analytical procedures.

How to approach this question

Use the formula: AR (fixed low) = RMM (High) x DR. Therefore DR must be Low. Low DR = More Work.

Full Answer

B.Set Detection Risk to Low and increase the extent of substantive procedures.✓ Correct

Detection Risk is the risk that the auditor fails to detect a misstatement. It is the only component the auditor controls. When the Risk of Material Misstatement (IR x CR) is high, the auditor must set Detection Risk low to hold overall Audit Risk at an acceptable level. Lower Detection Risk requires more effective, more extensive, or closer-to-year-end substantive procedures.

Common mistakes

Confusing Detection Risk with Risk of Material Misstatement.

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