Acca aa s21 Notes

risk of material misstatement
('ROMM') that was introduced in Chapter 8.
๏
The risk that audit procedures fail to detect it, so that the financial statements are published 
with the misstatement still present. This is 
detection risk
. 
ROMM has two components
๏
The risk that the error occurs in the first place. This is 
inherent risk.
๏
The risk that the client’s own procedures don’t pick up and correct that error. This is 
control risk
.
Therefore, for an inappropriate opinion to have been expressed:
The error 
has to 
occurred
The material 
error reaches 
the published 
financial 
statements
Audit risk
The client’s procedures 
and staff must not have 
picked that up and 
corrected it
The auditor must 
have failed to 
detect it
September 2021 to June 2022 exams
Watch our free ACCA AA lectures
56

---

Only on 
OpenTuition
you can find: Free ACCA notes 
•
Free ACCA lectures 
•
Free ACCA tests 
•
Free ACCA tutor support 
•
The largest ACCA community
3. The audit risk model
The 'audit risk model' is an equation which expresses the relationship between components of risk: 
Risk of material misstatement
Audit Risk
Control Risk
Inherent Risk
Detection Risk
Sampling Risk
Non-sampling Risk
AR
=
IR x CR
x
DR
Don’t look at this too mathematically. What it is saying is that auditors will want the audit risk to be 
low: they don’t want to make an error in their audit opinion. If they want the audit risk to be low then 
the terms on the right hand side of the equation, or at least some of them, have to be low.
If both inherent risk and control risks are high, then the only way you will get the audit risk low is to be 
very sure that your detection risk is low. This means more audit work than if RoMM were lower.
If inherent risk and control risks are low themselves, in other words that there is only a small chance 
the error occurs in the first place and internal controls are operating effectively, you can achieve a 
relatively low audit risk even with a relatively high detection risk. In other words the amount of audit 
work will be less than if RoMM were higher.
The auditor 
assesses
inherent and control risk - but cannot change them - they are 'givens' specific to 
each audit. Control risk is assessed if the auditor plans to test the operating effectiveness of controls. If 
not, the combined assessment of the RoMM is the same as the assessment of inherent risk.
The auditor must