The following may be used as a guide in the audit planning stage for determining the audit approach for individual account balance assertions. Although certain combinations of evidence are specified, the actual combination depends on the specific circumstances. Thus, in a particular audit engagement, it may be desirable to plan an approach that will gather a moderate quantity of highly reliable evidence rather than, say, a high quantity of moderately reliable evidence.
Note that this guide is based on the assumption that the maximum
acceptable level of detection risk [DR*
| Control risk [CR2] | Maximum acceptable level of detection risk [DR*2] | ||
|---|---|---|---|
| LOW | MODERATE | HIGH | |
| HIGH | In-depth substantive approach. No analytical procedures. Total reliance on a very high quantity1 of very highly reliable evidence from tests of detail. | Substantive and part analytical approach. Some analytical procedures3. Significant reliance on a high quantity1 of highly reliable evidence from tests of detail. | Substantive and analytical approach. Moderate reliance on analytical procedures3. Moderate reliance on a high quantity1 of moderately reliable evidence from tests of detail. |
| MODERATE | Part controls testing and part substantive approach2. No analytical procedures. Reliance on a high quantity1 of highly reliable evidence from tests of detail. | Part controls testing and part analytical approach2. Little reliance on analytical procedures. Reliance on a moderate quantity of moderately reliable evidence from tests of detail. | Part controls testing and analytical approach2. Significant reliance on analytical procedures. Reliance on a moderate quantity of evidence from test of detail. |
| LOW | Controls testing and part substantive approach2. Little reliance on analytical procedures. Reliance on a small quantity of moderately reliable evidence from test of detail. | Controls testing and part analytical approach2. Moderate reliance on analytical procedures. Reliance on a small quantity of evidence from tests of detail. | Controls testing and analytical approach2. Significant reliance on analytical procedures. Reliance on a very small quantity of evidence from tests of detail. |
1 All audit approaches shown above apart from the first (where CR2 is HIGH and DR*2 is LOW) are shown as non in-depth approaches. However, an in-depth substantive approach is often necessary when a high quantity of highly reliable evidence is called for, and almost certainly when a very high quantity is required. Note that in other instances, an in-depth (or a part in-depth) approach, although not necessary, may be more economical than a non in-depth approach.
2 A controls testing, or part controls testing approach will only be adopted where it is economical to do so. Where the auditor does not, or cannot, perform an evaluation of CR2 for any account balance assertion, the auditor assumes that it is HIGH, and a substantive approach is adopted.
3 When CR2 is evaluated as MODERATE or HIGH, less reliance is placed on the results of many types of analytical procedures. This is because of the nature of analytical procedures used in substantive testing, which involves a comparison of the value of the actual (ratio/trend/account balance/transaction) with the value of the expected (ratio/trend/account balance/transaction). Where expected values are based on evidence internally generated and subject to control procedures that are either not effective or not known to be effective, the evidence gathered using such procedures may not be reliable. However where the analytical procedure is one in which expectations are based on evidence that is independent of the accounting information system (as with a reasonableness test) and inherent risk is not HIGH, some reliance may be placed on the analytical procedure.
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