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Audit Risk Model (Types of Risk (Audit Risk (Inherent Risk (Factors…

- - - - Incentives for management to misstate financial statements
      - Human error
      - Competence and integrity of management
      - Inadequate internal controls
      - Complex and subjective accounting transactions
  - - - Audit Risk = Inherent Risk x Control Risk x Detection Risk
    - - Inherent risk recognizes that an error is more likely to occur in some areas than in others
      - Factors
        
        Susceptibility of the asset to the theft
        
        Volume of transactions
        
        Misstatements in prior periods
    - - Auditor must evaluate the design of the control and determine whether it has been placed in operation
    - - The risk that the audit procedures will fail to detect a material misstatements
      - Can be managed through
        
        Careful audit planning
        
        Performing procedures with professional care
        
        Effective audit procedures
  - - - Competition
      - Complexity of transactions
      - Technological change
      - Geographic location
      - Economic climate