Some managers may be more motivated to misstate earnings or assets than others. The better the organization's controls, the lower the likelihood of material misstatements. The amount of audit work performed should vary directly with the likelihood of material misstatements existing in the accounting records. Inherent risk - the susceptibility of transactions to be recorded in error. The auditor must understand the business being audited Control risk - the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity's system of internal control.
Some control risk is present in every engagement.
Environment risk - the combination of inherent and control risk is often referred to as environment risk. Detection risk - risk that the auditor will not detect a material misstatement that exists in an assertion. The auditor, as an integral part of audit planning, controls detection risk. If environmental risk is assessed as high, the auditor will have to do more work directly testing the account balance. Using a quantitative approach to assess environmental risk with probability assessments applied to each of the model's components implies that each individual component can be precisely measured when they cannot be.