Audit Risk Assessment Model

Abstract

Purpose: The purpose of this study is the development of an audit risk model based on the decomposition of classical Audit Risk Model (ARM) with the addition of elements to assess the risks associated with various aspects of the task. Design/Methodology/Approach: The classical ARM is the basis of our model. The factors of the first and second order in the proposed model are the same as in the classical ARM, namely, the risk of significant distortion and the risk of non-detection. The risk of material misstatement is disaggregated into inherent and control risks. We included in the list of second-order factors that affect the value of risk of significant distortion, the risk of material misstatement of financial statements due to unfair acts. Findings: The paper contains the classic ARM's development analysis and the current researches in audit risk modeling review. We formulated the requirements to desired ARM's characteristics based on analysis we made. The ARM modification by classical conceptual model decomposition to the level of simple binary statements is presented. We describe the main structural elements of the developed model and their interrelations. Practical Implications. The presented disaggregated ARM can be used as a methodological basis for assessing audit risk in the course of fulfilling assignments for the audit of financial statements. Originality/Value: The classical ARM author's modification has been developed with the aim to its adapting to a practical risk assessment through logical-probabilistic modeling. Keywords: Audit risk model, risk of material misstatement, risk of significant distortion, risk assessment, logical-probabilistic modeling. JEL Code: C69, D81, M42.