Audit Memo

512 Words3 Pages
I am writing this memo in response to your request that I prepare a portion of the firm’s new training module explaining the audit risk model to our first year auditors. First, I will describe why the audit risk model is used and explain each of the three components of the model. I will then explain what business risks are and give some examples of those risks. Next, I will describe the control environment of an organization and list some of the factors that contribute to the control environment. Finally, I will explain why an auditor performs risk assessment procedures and describe the procedures used. Auditors use the audit risk model to manage the overall risk of an engagement. The audit risk model is comprised of three components: inherent risk, control risk and detection risk. Inherent risk is the risk that errors, misstatements or deviations will occur. Control risk is the risk that the client’s internal control system will fail to prevent, detect or correct errors. Detection risk is the risk that the auditor’s procedures will fail to detect errors. The audit risk can be calculated as AR = IR x CR x DR.…show more content…
These risks can be diverse and wide-ranging. The ultimate business risk is that the organization would cease to be a going concern. Therefore, these risks include any factors that contribute to the organization’s failure. Some examples include the decline in product demand, an increase in market competition, economic instability and the risk of fraud and theft. An auditor must gain an understanding of the organization, its environment, its significant business risks and how these risks could develop into audit
Open Document