Evaluation of detection risk at the financial statement
level
The achievable level of detection risk at the financial statement level is evaluated based
on the auditor’s (or audit firm's) perceived ability to detect a
misstatement in the particular client's financial statements.
Auditors evaluate the achievable level of detection risk at the financial statement level as
LOW (a low risk that significant misstatements will not be detected by the auditor), MODERATE or HIGH ( a high risk that significant misstatements will not be detected by the auditor) and is based on:
- independence of the auditor. The independence of the auditor refers to the perceived ability
of the auditor (and the audit firm) to objectively provide a credible opinion on the financial statements of the client entity.
- ability to provide an appropriate level of service. This
requires evidence as to whether the audit firm has available audit
staff with the necessary skills and competence, including both
technical (e.g. computer auditing, statistical sampling) and
industry skills (e.g. knowledge of insurance, banking, mining
industries). The greater the competence and experience [fn]of the audit engagement team, the lower the achievable level of detection risk.
In order to assess staff competence, evidence as to
the existence of the following policies and procedures is gathered:
- personnel hiring policies. In other words, policies that aim to
ensure that audit staff that are engaged by the firm are
appropriately qualified and experienced.
- guidelines for the evaluation of the qualifications and
experience of potential employees, identifying personal attributes
(such as integrity, motivation and intelligence) and the achieved
attributes (such as academic, personal, work).
- guidelines for continuing education, such as guidelines as to
how continuing education requirements for particular auditors and
staff within the firm should be determined.
- criteria for the evaluation of individual performance, such as
the extent to which technical knowledge, analytical skills, and
communication skills are needed by various auditors and staff.
- other matters, including guidelines for using and evaluating
the work of an expert, using and evaluating the work of another
auditor, appropriate policies for
delegation, supervision and
review, and peer review. Refer to the Journal of Accountancy article
Peer Review Is Stronger
and Better Now.
In addition, evidence may be gathered as to whether the audit firm
has continuing policies of both client and firm evaluation to
ensure that not only are such matters as changes in the nature of
the client's business considered, but also to ensure that the
auditor and the audit firm continues in its ability to service the
client independently and competently. (Refer to ISA220 "Quality
Control for Audit Work").
Achievable level of detection risk at the financial statement level is evaluated as
LOW (when both audit independence and ability are evaluated as
high), MODERATE, or HIGH (when both audit independence and ability
are evaluated as low).
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