Inherent Risk:- Chances that Sales will get Misstated Because of Huge Volume at Year End. Supposse 30% transactions are Misstated
Control Risk: – Chances that ICS developed for proper accounting of SAles will fail. SAy 50% Risk Controls will not be able to detect
RMM: – Chances that sales given in P&L are Misstated 30% x 50% = 15 % Chance
RMM is residual risk what remains after applying control risk
COntrol Risk means chances that Controls Fails and they are not able to Prevent / Detect / Correct Misstatements, Your explanation of control risk as given in question is not perfect
Thank you sir I got it well… bit confusing so let me reiterate for confirmation that what I understood is correct.
Control Risk = they only see that amount of frauds/errors being unidentified even when ICS are established
Risk of MM = when control risk is applied on Inherent risk, the proportion of risk obtained is RMM.
am I correct?
What I didn’t understand is that Control risks which fail in detecting fraud/error, are only for those areas where inherent risk is there or is it also for all the areas of FST (whether material or not)?
For instance in retail business, bank statements/salary isn’t material and hence they do not fall under inherent risk. but ICS also fail to detect frauds/errors in these areas. So can these areas to can be said to have control risk?
Yes your explanation is fine.
RMM = IR x CR
so its combination of two things. we have to see both in all areas. in some areas both can be low and resultant RMM will be low. In some areas combination can be medium and so on.
So in some areas RMM will be low like you pointed out in salary. then we will have to perform less audit procedures in such areas. RMM is one of the important factor which determines amount of efforts we put and evidence we get in each area.
in SA 330 we learn, that some substantive procedures as must for material areas even if RMM is low. So that all material areas get some attention.
by doing all this we become efficient and effective, save time from less important areas and give more effort to important areas.