Risk Assessment Planned Response

Risk Assessment & Planned Response Exam: CPA — Certified Public Accountant Chapter: Chapter 4 — AUD Risk Assessment and Response Standards: AU-C 315 (Risk Assessment); AU-C 330 (Responding to Assessed Risks) Last Updated: 2026-06-26 --- ## Key Takeaways - The audit risk model: AR = IR × CR × DR - Risk of material misstatement (RMM) = IR × CR — this is what the auditor assesses - Detection risk (DR) is what the auditor controls by adjusting the nature, timing, and extent of procedures - Higher RMM → lower acceptable DR → more or better evidence needed - Auditors respond to risk at two levels: financial statement level and assertion level --- ## The Audit Risk Model AR = IR × CR × DR | Component | Full Name | Who Controls It | Definition | |---|---|---|---| | AR | Audit risk | Auditor sets (typically ≤ 5%) | Risk that auditor issues wrong opinion on materially misstated FS | | IR | Inherent risk | Client / environment | Susceptibility of an assertion to misstatement, before considering internal controls | | CR | Control risk | Client's internal controls | Risk that internal controls fail to prevent or detect a material misstatement | | DR | Detection risk | Auditor | Risk that audit procedures fail to detect a misstatement that exists | The auditor's lever: AR and RMM (IR × CR) are given — the auditor adjusts DR by changing audit procedures. Inverse relationship: Lower CR (strong controls) → higher tolerable DR → less substantive work needed. Higher RMM → lower acceptable DR → more substantive work required. --- ## Risk of Material Misstatement (RMM) **RMM…