Abstract The article presents the author's views on Lea Adams and Boykin (LAB) model related to audit risk management. LAB presents the argument that the definition of inherent risk in professional standards cannot be interpreted literally if one is to have a risk assessment methodology which makes sense on aggregating component risks. According to the author, inherent risk in LAB is not new but something which is already fairly well established. In LAB model, for each level of pre-control error, there is the subjective assessment of a probability distribution function for the error in the assertion after the effect of internal control. If two probability assessments are conditioned on the set of their common factors, then multiplicative combination rules can be applied to aggregate the risk assessments. LAB argues that a transaction stream organization of the risk assessment approach is more appropriate than a balance level assertion approach as it is more conducive to achieving conditional independence. The author strongly criticizes the conclusion of LAB that audit risk assessment should be structured by transaction stream.
Stephen J. Aldersley (Wed,) studied this question.