The chapter discusses the audit risks of a contractor when examining individual contracts. It identifies ten risky areas in auditing contractor contracts and provides guidance on common audit procedures to address these risks. The auditor estimates the maximum level of misstatement in financial statements that can be tolerated without significantly affecting a user's judgment. By using the audit risk model, auditors aim for a thorough and efficient audit that identifies material misstatements while avoiding unnecessary procedures. Understanding the nature of the audit and applying appropriate procedures leads to an effective and efficient audit.