Activity Based Risk Evaluation Model of Auditing

HOME >> FRAMEWORK >> AUDIT PLANNING STAGE: EVIDENCE GATHERING ACTIVITIES

Audit planning stage: evidence gathering:
Detailed knowledge of the client's business

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

In order to determine the audit approach, and after preparing the tactical plan, auditors gather the evidence identified in the tactical plan, at the same time obtaining a detailed knowledge of the client's business. This detailed knowledge includes knowledge of the components of audit risk for each account balance assertion. Thus, auditors gather evidence in relation to:

• acceptable audit risk AR*₂, for each account balance assertion. The greater the expected reliance on a particular account balance assertion by financial statement users, the lower is the acceptable audit risk in relation to that assertion. Thus the auditor gathers evidence relating to the expected reliance that will be placed on individual account balance assertions by financial statement users.

  Activities performed in gathering this evidence include observation, inspection and inquiry.

• inherent risk IR₂ relating to each account balance assertion. This is the risk of misstatement in the unaudited value of an account balance assertion, in the absence of any control procedures. IR₂ is affected by factors such as the degree of management judgement involved in the determination of the value of the account balance assertion (the greater the degree of management judgement, the greater the inherent risk); the extent to which the account balance contains unusual or complex transactions (the greater the extent, the greater the inherent risk); the susceptibility of the account balance, including underlying classes of transaction, to adjustment (the greater the susceptibility, the greater the inherent risk).

  Activities performed in gathering this evidence include observation, inspection , inquiry and analytical procedures such as ratio analysis .

• control risk CR₂ at the account balance level. This is the risk that an entity's internal control procedures will not prevent a material misstatement of an assertion relating to a particular account balance or underlying class of transaction. Evidence that is relevant to CR₂ is evidence of the effectiveness of the design of internal control procedures: the less effective the design, the greater the control risk.

  Activities that auditors perform in gathering this evidence include observation, inquiry , inspection , reperformance and the use of some CAATs including integrated test facility, parallel simulation, test data, programmed code analysis and specialized audit software.

For a continuing audit, the auditor obtains much of this information from the working papers relating to the audit of the entity in the previous year. In such an instance, the auditor ensures that the information in the prior year's working papers has not changed and is still relevant.

After the auditor gathers the evidence above, the auditor evaluates the evidence. Refer to the next activity.

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