Audit Risk Decision Model

Audit Risk Decision Model

The term Audit Risk Decision Model (ARDM) describes the process a company or individual follows in order to determine the level of audit risk when planning and executing an audit. This article explores the role of ARDM in assessing audit risk and the benefits of using ARDM.

The ARDM defines the criteria used to determine the level of audit risk. Generally, audit risk is defined as the likelihood of misstatement in the financial statements due to error or fraud. In order to assess audit risk, the auditor must consider both the inherent risk associated with the entity and the control risk. Inherent risk is the risk of material misstatement based on the nature of the business or the type of transactions conducted. Control risk is defined as the risk of material misstatement due to the failure of the internal control system to detect misstatement at an acceptable level of precision.

The ARDM helps an auditor to estimate the levels of overall audit risk associated with a specific audit. The audit risk decision model has two main components: the Risk Identification component and the Risk Analysis component. The Risk Identification component involves identifying significant risks associated with the audit. This component involves collecting and analyzing evidence about the entity and its operations, financial information, and internal control systems. After the risk identification process, the risk analysis component uses the information gathered to calculate the overall audit risk.

The Risk Analysis component incorporates different risk components into the ARDM such as the inherent risk, control risk and fraud risk. The control risk component includes factors such as segregation of duties, management’s monitoring and system of supervisions. The fraud risk component includes understanding whether fraud is likely to occur and the impact of fraud on the financial statements.

The ARDM allows an auditor to develop an overall audit risk calculation based on all of the identified risks. This calculation provides the audit team with an understanding of the financial statement audit risk and provides guidance on the steps to be taken if any material misstatements are to be avoided.

The use of ARDM has many benefits for both the auditor and the entity being audited. By using ARDM, the auditor can save time and resources as the process is automated, reducing the intense manual labor associated with risk identification and analysis. Furthermore, it provides a greater level of assurance to auditors that the audit is being carried out according to established guidelines. The use of ARDM also reduces the amount of time auditors spend on calculating the audit risk levels which can reduce the costs associated with the audit process.

In conclusion, ARDM is an invaluable tool for auditors and can provide considerable benefits to the auditor, the auditee and other stakeholders. By properly understanding and applying the ARDM, auditors can reduce audit risk and increase the level of confidence in the financial statements being audited.

Audit risk decision-making model is a kind of decision model to control audit risk. It will help auditors determine the most appropriate auditing strategy based on the audit risk, cost and benefit of the audit decision.

The main purpose of the audit risk decision-making model is to maximize audit accuracy while minimizing audit costs. This helps the organization to make the most cost-effective decisions.

The audit risk decision-making process starts with the identification of the audit objectives. The auditors then assess the risk associated with achieving the identified audit objectives. On the basis of the identified risks, auditors then implement strategies to identify, measure and control the audit risks. The strategies employed to identify and measure the audit risks are generally referred to as audit procedures.

The auditors must then evaluate the cost effectiveness of the audit procedures employed. Cost effectiveness considers the cost of the audit in relation to the expected benefit from the audit. Benefit is defined as the expected increase in accuracy.

Upon completion of the evaluation stage, the inspector must decide whether to implement the proposed audit procedures or reject them. This decision is dependent on the audit risk, the cost of the audit and the expected benefits.

Finally, the auditor must complete the audit and provide an audit report. The audit report should contain an assessment of the audit accuracy, a discussion of the issues raised in the audit and any changes which need to be made as a result of the audit. It is also important for the auditor to provide a recommendation concerning a potential course of action to address the issues highlighted by the audit.

Audit risk decision-making models have become an important tool used by auditors to ensure accuracy and cost effectiveness in their audits. It provides a systematic approach to identifying and measuring audit risks, evaluating the audit procedures used, and making an objective decision concerning the audit.