CONTROL AND INHERENT RISK ASSESSMENTS IN CLIENT ENGAGEMENTS - AN EXAMINATION OF THEIR INTERDEPENDENCIES

Professional pronouncements which have advanced and defined the concepts of control risk and inherent risk have tended to treat them as independent for modeling purposes, and recommended that inherent risk be set at the maximum because of an inability to quantify it. Relevant accounting literature, meanwhile, has reasoned that these two risks are interdependent and that failure to recognize them as such may lead to an underestimation of overall audit risk. The purpose of this research note is to posit that the Auditing Standards Board's control environment construct in fact, may contribute to the interdependence of the control risk and inherent risk constructs in practice. To this end, this paper describes an empirical study of an extensive array of client control environment attributes and their perceived relevance to both the control risk and inherent risk assessments, Implications for research, policy, and practice are explored.