CA Inter P5 · Chapter 3 · Question 13 of 13
An auditor uses the audit risk model AR = IR x CR x DR. Acceptable audit risk is 4%, inherent risk is assessed at 80% and control risk at 50%. What is the maximum acceptable detection risk?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 10%
Explanation
DR = AR / (IR x CR) = 0.04 / (0.80 x 0.50) = 0.04 / 0.40 = 0.10, or 10%. 8% results from ignoring inherent risk (0.04/0.50), 5% from ignoring control risk (0.04/0.80), and 1.6% from multiplying instead of dividing (0.04 x 0.40). A lower acceptable detection risk would call for more substantive work.
More Risk Assessment and Internal Control MCQs
- Q2The auditor of Prakash Chemicals Ltd. has assessed the risk of material misstatement for inventory valuation as high. The auditor should…
- Q3Which of the following is NOT one of the risk assessment procedures listed in SA 315?
- Q4The auditor of Saanvi Realty Ltd. has identified revenue recognition on long-term contracts as a significant risk and plans to respond…
- Q5Which of the following is NOT a component of internal control described in SA 315?
- Q6At Ishaan Logistics Ltd., the stores keeper and the security guard together removed goods from the warehouse and prepared matching false…