Activity Based Risk Evaluation Model of Auditing

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Audit planning stage: decision making:
the audit approach decision

ACTIV- ITIES	STAGES
	CA/R	AP	CT	ST	OF
PL	SP	TP	OP	OP	OP
EG	PK	DK	EofO	EofM	CFS
EE	AR1	DR*2	DR*3	AR4	AR5
DM	A/R	AA	CR?	CAB	AO

After estimating the value of the acceptable detection risk DR*₂, the auditor decides on the audit approach. To assist in this decision, the auditor considers the individual values at the account balance level of, and the relationship between, control risk CR₂ and detection risk DR*₂, as follows:

• Control risk CR₂. Specifically, CR₂ is used to assist in determining the extent to which a systems approach is appropriate. Where the evaluation of CR₂ for a particular account balance assertion is HIGH, a verification (or non systems) approach is adopted in respect of that account balance assertion. Where CR₂ is LOW or MODERATE, a systems, or part systems approach may be adopted.

  In some instances, even though CR₂ is less than HIGH, the auditor may determine that it is not economical to adopt a (part) systems approach ^[fn].

• Acceptable detection risk DR*₂. DR*₂ is used to assist in determining the extent to which an in-depth approach is appropriate. Where DR*₂ is MODERATE or HIGH, an in-depth approach, which requires the auditor to perform additional transaction testing, is not required. When DR*₂ is LOW, an in-depth approach may be required and is almost certainly required when DR*₂ is VERY LOW.

  In some instances, the cost of performing the additional transaction testing may be offset by the reduced cost of audit procedures directed at the related account balance assertion. In other instances (for example, assertions relating to income and expense account balances) it may be impossible or impracticable to gather evidence at the account balance level. In all of these instances, the auditor may decide to adopt an in-depth approach even though DR*₂ is not LOW or VERY LOW.

• Relationship between CR₂ and DR*₂. Where CR₂ is LOW and DR*₂ is HIGH, the auditor nearly always chooses an analytical approach. This is because an analytical approach places heavy emphasis on the use of analytical procedures (usually an economical method of gathering evidence), rather than tests of detail (which are a relatively expensive method of gathering evidence).

  As the value of CR₂ increases and the value of DR*₂ decreases, the feasibility of using an analytical approach lessens. When CR₂ is HIGH and DR*₂ is LOW, the auditor is not able to use any analytical procedures.

Refer to the audit approach table.

Other factors that may influence the audit approach decision include the availability of audit staff, expected reliance on internal auditors, the need for experts and the extent of any assistance from the client's management and staff.

The audit approach for each account balance assertion, as well as the rationale underlying the audit approach decision, together with the time budget and the staff planning schedule, are all documented as part of the overall tactical audit plan.

This completes the tactical planning of the audit.

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