Question

1. What two main factors affect the audit evidence needed? Why do those factors each have a major impact on audit evidence?

2. Fully explain how an auditor would actually achieve the level of audit risk they decided in the planning stage.

Answer 1

The following are the factors that affect the evidence  

1. Source ; Source is evaluated based on its provider's independence, objectivity, internal control's strength and etc.
2. Verifiability ; Such as Official Receipts with OR number, Particulars, date and company name and etc.
3. Technical procedures used: such as Sampling techniques.
4. Audit knowledge.

Audit risk

Audit risk is the risk that the auditor will express an inappropriate audit opinion on financial statements that contain material misstatements. From audit risk stems a concept called “acceptable level of audit risk.” The acceptable level of audit risk is what the auditor determines is acceptable for the specific company being audited. The key point is that the auditor, not the entity being audited, chooses what is an acceptable level of risk. The lower the level of acceptable audit risk, the higher the desired level of assurance/certainty, and vice versa.

Audit risk formula

  The audit risk model is best understood through a mathematical formula:

DR = AR/IR*CR

DR = Detection risk

AR = Audit risk

IR = Inherent risk

CR = control risk

  

  Looking at the denominator first, inherent risk (IR) is the risk/susceptibility of an assertion to a material misstatement without considering internal controls. It means that there is an error in the first place.

  Control risk (CR) is the risk that the client’s system of internal controls (i.e. policies and procedures put in place by management to enhance the reliability of the financial statements) will fail to prevent or detect a material misstatement. And finally, detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion.

  Therefore, audit risk and detection risk are related to the auditor and inherent and control risk are independent of the auditor; they exist within the client regardless of an audit. According to the audit/detection risk that the auditor decides, the types of audit procedures are designed accordingly. A lower detection risk will require more persuasive evidence over a higher detection risk.