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Auditing & Assurance › Audit Risk & Materiality

How are inherent risk and control risk combined into RMM?

Intermediate

Answer

The risk of material misstatement is the combined assessment of inherent risk and control risk at the assertion level (RMM = IR x CR conceptually). ISA 315 (Revised) encourages assessing inherent risk and control risk separately, so the auditor sees the source of risk and can design responses—relying on controls only where control risk is assessed as lower after testing.
Real-world example High inherent risk on estimates plus effective controls yields a moderate RMM, guiding the extent of substantive work.

Common follow-ups: Why assess IR and CR separately? | When can you rely on controls to lower RMM?

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All 18 Audit Risk & Materiality questions