I don't understand Risk of Material Misstatement no matter how hard I try. This ALWAYS stumps me on the exam.
I know the formula, what I don't understand is what increases and decreases certain risks.
I don't understand why I can't grasp this concept and it always kills me on the MC as well as the Sims each time.
Inherent Risk, Control Risk, Detection Risk, and overall audit risk are usually the choices on the exam.
I know Inherent risk and control risk can't be controlled by the auditor, only detection risk can be.
So I always thought inherent risk can't increase or decrease because it's innately inherent.
In terms of control risk, I figure when the auditor has a high detection risk, control risk is lower, and if he has a low detection risk, control risk increases.
When does overall audit risk come into play?
I also don't understand the internal concept behind the increase/decrease even though I know the formula.
I feel that if detection risk (the auditor's risk that he will detect an issue) is high, obviously control risk should be lower. This means that there is a high risk that the auditor will not or will detect a problem? Or that he tolerates a higher risk or tolerates a lower risk?
I'm sorry if this sounds confusing, but I've struggled with this since last year. I get so confused.
If anyone can give me some advice or help on how to go about this I'd really appreciate it!