The acceptable level of detection risk for a particular account balance assertion is the maximum level of detection risk an auditor can allow to occur, based on specified levels of audit risk, inherent risk and control risk applicable to that account balance assertion. Its value is required in the audit planning and control testing stages where it is referred to as DR*2 and DR*3 respectively. (Note that an asterisk is used to differentiate the acceptable level from the achievable level of detection risk and the subscripts indicate when DR* is evaluated, in this case in the second and third audit stages).
The value of DR*2 in the audit planning stage gives the auditor an indication of the nature, timing and extent of the necessary audit procedures relating to the account balance assertion in question. The lower the value of the acceptable level of detection risk:
DR*2 is not evaluated as other risks; rather, it is determined based on individual evaluations of the acceptable level of audit risk AR*2, inherent risk IR2, and control risk CR2 for each material account balance assertion, as follows:
Given AR2 = IR2 x CR2 x DR2 (the audit risk model),
then the achievable level of audit risk [DR2] may be calculated as follows:
DR2 = AR2 / IR2 x CR2.
Assuming that the acceptable level of audit risk must be at least achievable, i.e. the achievable level of audit risk (AR2) is equal to or less than acceptable level of audit risk (AR*2), then the value of AR*2 may be substituted for AR2, to provide a value for the maximum acceptable level of detection risk DR*2:
DR*2 = AR*2 / IR2 x CR2.
Acceptable level of audit risk (AR*2) is dependent upon on the expected reliance on the account balance assertion (estimated by reference to the expected reliance on the financial statements as a whole (AR*1) adjusted for any increased or reduced reliance on the account balance assertion.
Inherent risk IR2 and control risk CR2 are then evaluated based on the values of inherent and control risk at the financial statement level, adjusted for any increased or reduced risk relating to the account balance assertion in question.
Acceptable level of detection risk DR*2 is the only unknown. Its value (ranging from VERY LOW to VERY HIGH) may be calculated. (Refer tables). The value for the acceptable level of detection risk is then used to assist the auditor in determining the audit approach.
Note that DR*3 is simply a re-evaluation of DR*2 that may be necessary in the third audit stage (control testing stage).
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