The achievable level of audit risk (which may be referred to elsewhere in these pages as simply audit risk or AR), may be defined as the risk of a material misstatement in the audited financial statements of a client, or underlying account balances. (The Glossary to ISAs defines audit risk as "the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.") Unless otherwise stated, audit risk is always an ex ante concept in that it refers to the achievable level of audit risk rather than a level of achieved risk [fn]. This achievable level of audit risk is not to be confused with the acceptable level of audit risk, or AR*, which is inversely related to the expected reliance on the financial statements.
The achievable level of audit risk is evaluated at different stages of the audit engagement and at different levels of aggregation, as shown in the table below.
| LEVEL OF AGGREGATION | AUDIT STAGES | ||||
|---|---|---|---|---|---|
| Client acceptance/ retention | Audit planning | Control testing | Substantive testing | Opinion formulation | |
| Financial statement level | AR1 | na | na | na | AR5 |
| Account balance assertion level | na | AR2 | AR3 | AR4 | na |
Audit risk evaluated during one audit stage may be different to audit risk evaluated during a subsequent stage because, for example, the auditor's increased knowledge of the business gained as the audit progresses may lead the auditor to re-evaluate the components of audit risk differently.
Audit risk is also evaluated at different levels of aggregation. Audit risk at the financial statement level is different to audit risk at the account balance assertion level. The difference arises because the concept of materiality (which by definition is an integral component of audit risk) results in a material misstatement at the account balance assertion level having a lesser value than a material misstatement at the financial statement level.
The auditor's evaluation of AR1 for each financial statement item assertion is relevant to the client acceptance/ retention decision.
The evaluation of AR2 for each account balance assertion is relevant to the audit approach decision. Given that audit risk AR2 must be not greater than the acceptable level of audit risk AR*2, the auditor uses the value of the latter in the equation for the audit risk model to determine the acceptable detection risk DR*2. The auditor uses this relationship in the audit planning stage to assist in determining the audit approach for each account balance assertion.
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