Academic journal article Journal of Accountancy

Inherent Risk and Control Risk Assessments

Academic journal article Journal of Accountancy

Inherent Risk and Control Risk Assessments

Article excerpt

Pervasive and specific risk factors share the floor.

The AICPA's audit risk model serves as the major framework for conducting audits of financial statements. Researchers and practitioners are critical of the model because its multiplicative form suggests the components of inherent risk, control risk, and detection risk are independent. Many argue the components are, in reality, dependent, which if ignored can result in a biased estimate of audit risk. Specifically, the model does not take into account the preventative aspect of control risk and, as a result, does not formally capture this dependence between inherent risk and control risk.

We argue that auditors recognize this dependency and make judgments accordingly. To examine this issue, 124 senior auditors and managers were asked to make inherent risk and control risk assessments on eight cases which varied four inherent risk factors and the results of control testing. The findings showed that pervasive and specific inherent and control risk factors significantly affected both auditors' inherent risk and control risk assessments. …

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