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© 2008 Prentice Hall Business Publishing     Accounting Information Systems, 11/e    Romney/Steinbart

23 of 151

THE NATURE OF AUDITING

The audit should be planned so that the greatest amount of audit work focuses on areas with the highest risk factors.

There are three types of risk when conducting an audit:

Inherent risk

Control risk

The risk that a material misstatement will get through the internal control structure and into the financial statements.

Inversely related to the strength of the company’s internal controls, i.e., stronger controls means lower control risk.

Can be determined by:

Reviewing the control environment.

Considering control weaknesses identified in prior audits and evaluating how they have been rectified.

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