Activity Based Risk Evaluation Model of Auditing

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Tables for the estimation of the value of AR,
given estimated evaluations of IR, CR and DR

First, evaluate the risk of risk of material misstatement [RMM]. This may be done directly, or indirectly by applying known values of inherent risk and control risk in the table below.

Inherent risk [IR]	Control risk [CR]
	Low	Moderate	High
Low	LOW	LOW - MOD	MOD
Moderate	LOW - MOD	MOD	MOD - HIGH
High	MOD	MOD - HIGH	HIGH

For example, if IR is high and CR is moderate then, using the table above, the risk of material misstatement [RMM] is MOD-HIGH.

Secondly, the RMM may be used to determine, in the next table (below), the achievable level of audit risk, given the achievable level of detection risk.

Achievable level of audit risk [AR], given the achievable level of detection risk [DR] and the risk of material misstatement [RMM]

Achievable level of detection risk [DR]	Risk of material misstatement (RMM = IR x CR)
	Low	Low - mod	Moderate	Mod - high	High
Low	VERY LOW	VERY LOW	VERY LOW	LOW	MOD
Moderate	VERY LOW	VERY LOW	LOW	MOD	HIGH
High	VERY LOW	LOW	MOD	HIGH	VERY HIGH

For example, if the risk of material misstatement [RMM] is moderate - high and the achievable level of detection risk [DR] is low, then the achievable level of audit risk is [AR] is LOW.

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