A firm uses the audit risk model, AR=RMMXDR to plan audit programs, as described below....
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A firm uses the audit risk model, AR=RMMXDR to plan audit programs, as described below. This often involves determining required DR after specifying M and AR, and then assessing the operating effectiveness of controls in terms of RMM, or DR=RMM / AR THE FIRM'S POLICIES Audit Risk: The firm specifies AR for every application area and for any materiality amount, as: VERY LOW 1% to 50% is not permissible under the firm's guidelines. 2 Assume that scope of the examination (nature, extent and timing of procedures] remains constant. A. What effect does decreasing the materiality amount have on DR? B. What effect does increasing the materiality amount [making it a larger amount] have on AR? 4 Assume that the auditor had determined the scope based specifying M, AR, RMM, and DR. B. If scope is enhanced, but AR is unchanged, what is the possible effect on the amount of misstatement that could be detected at that fixed level of AR? (This is the same as asking what is the effect on M?]
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