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CA Final · Advanced Auditing, Assurance and Professional Ethics · General Auditing Principles and Auditors Responsibilities

CA Vikram is auditing Deccan Steels Ltd. He plans to quantify audit risk using a model that expresses the relationship of the components of audit risk in mathematical terms to set an acceptable level of detection risk. A junior argues that SAs prohibit this. What is the correct position under SA 200?

The auditor may use a model that expresses the relationship of audit risk components in mathematical terms to arrive at an acceptable level of detection risk. SA 200 treats it as one of various approaches, which some auditors find useful when planning procedures. It is neither prohibited nor mandatory.

  1. AThe model is prohibited, since audit risk cannot be expressed in any mathematical form
  2. BThe model is mandatory for all audits, replacing professional judgment
  3. CThe auditor may use such a model as one approach to assess risks of material misstatement, and some auditors find it useful when planning audit proceduresCorrect
  4. DThe model may be used only for assessing risks at the financial statement level and never at the assertion level

Explanation

SA 200 says auditors use various approaches to assess risks of material misstatement, and may use a model expressing the relationship of audit risk components mathematically to arrive at an acceptable detection risk; some find it useful in planning. It is neither prohibited nor mandatory.

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