[mgoloubenko]

Hey everyone,

Hope you’re doing well. As some of you may know, I’m gearing up for an Audit retake and I think that I’ve identified a weakness in Audit that I am kind of struggling with. It has to do with the Audit Risk model. I’m having trouble understanding how the components work together. I understand the definitions of each type of risk but the trouble is in deciphering how the components change the overall model in specific situations. I’ve gone over the material in Becker again & the NINJA notes but I am still confused. I searched previous threads on here and came across something by YankeeAccountant that deals with the type of issue I’m having (how to identify which situations change which risk):

“I did a bit of research on your question, I went to the PCAOB site. I used derivatives/hedging as a general category that would increase inherent risk. Here are some details:

there would be an increase in inherent risk if a company decided to venture into derivatives/hedging to offset price fluctuations in materials or investments (especially never having done it before)

overall fluctuations in interest rate would increase inherent risk for a company that would be closely related/exposed to what their investment holdings may be, this could also extend to specific industries. For example, currently businesses related to the housing market probably have increased inherent risk.

The increase in credit risk associated with amounts due under debt securities issued by entities that operate in declining industries increases the inherent risk for valuation assertions about those securities.

I got most of this from PCAOB 332.08. I will add that I think of inherent risk similar to Beta. It is an overall risk. Think of stocks and what moves them and that is pretty much inherent risk. At least that is how I see it in my head.

In terms of Control Risk………

if there was a change in accounting systems for a business, that might increase control risk for the auditor. Some controls may be missing in the transition, and the controls haven’t been reviewed as to their effectiveness.

If a business had recently added a management override function

If a business recently had large turnovers in its internal control department

If a business had some management changes and the control environment has changed considerably

If a business began issuing credit cards for travel purposes”

So I found this to be really helpful since it addresses specific situations in which the auditor changes the assessment of Control Risk & Inherent risk. But let me get this straight, I’ll use numbers:

Let’s say overall Audit Risk is a 10. The 10 is always constant right? Like there are no specific situations that would adjust Audit risk to a different amount because Audit Risk can be kept constant by changing the Detection risk to either a higher or lower acceptable level of DR.

Now how does a change in the assessment of Inherent Risk affect control risk, and detection risk as well as overall audit risk? Same thing for a change in the assessment of Control risk…

FAR 4/9/12- PASSED
BEC 7/13/12- PASSED
AUD 8/16/12- Ughhh 71, Rematch: 90!!!
REG-12/6/12 PASSED

USC MAcc- Fight on!

They say good things come to those who wait, but only those things that are left by those who hustle.