I had 2 questions about audit risk.
Audit Risk= Inherent Risk +Control Risk + Detection Risk
Detection risk has an inverse relationship to Inherent and Control Risk( I think these two risks are called risk of material misstatement). In many problems I have seen, they will for instance say, if the risk of material misstatement increases, what happens to the detection risk? Since they have an inverse relationship detection risk would decrease. That is pretty straightforward, but I had a more specific question. Let’s say there is a question or even a simulation for that matter that asks you to identify the effect on all 3 risks.
1. When looking at a situation. How would you go about it? I would think it would be easier to figure out the detection risk first. That way you would know that the risk of material risk would have an inverse effect.
2. If you are able to decide that the detection risk increases, would both inherent and the control risk decrease then? Or would only 1 decrease.
In a possible situation, I would think that it would be the best strategy if you are unsure of the effect of the inherent/control risk, would be to figure out the detection risk. You then know the inherent and control risk would have to be the opposite. Does this make sense to you guys? Thanks