Which of the following describes the components of the audit risk model that are used to describe the risk of material misstatement (RMM)?
A) AR / DR
B) IR × CR
C) IR × DR
D) CR × DR

Question

Quizplus · Accepted Answer

The risk of material misstatement is composed of two components: inherent risk (IR) and control risk (CR). The audit risk model can be expressed as AR = IR x CR x DR, where AR is audit risk and DR is detection risk. The formula shows that the auditor can control DR by increasing or decreasing substantive testing. Therefore, the correct formula to describe RMM is IR x CR, as it represents the risk of material misstatement before the auditor's intervention.

Which of the Following Describes the Components of the Audit