Activity Based Risk Evaluation Model of Auditing

HOME >> FRAMEWORK >> CLIENT ACCEPTANCE/RETENTION STAGE: EVIDENCE EVALUATION ACTIVITIES

Client acceptance rejection stage: evidence evaluation:
AR*₁ ~ AR₁

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 each audit stage, auditors undertake certain evidence evaluation activities. In the client acceptance stage, based on the auditor's preliminary knowledge of the client's business, the auditor evaluates the acceptable audit risk AR*₁ and the (achievable) audit risk AR₁ at the financial statement level, and then estimates whether audit evidence of sufficient quantity and appropriate quality has been gathered in order to make the decision to accept (retain) the entity as a client.

• Acceptable audit risk AR*₁ Based on evidence gathered as to the expected degree of planned reliance on the audited financial statements, the auditor evaluates the acceptable audit risk AR*₁ as VERY LOW, LOW or MODERATE. For example, if the entity is a corporation listed on a stock exchange with considerable borrowings from the public, then AR*₁ is evaluated as VERY LOW.
• (Achievable) audit risk AR₁ Based on evidence gathered, the auditor evaluates inherent risk IR₁, control risk CR₁ and the (achievable) detection risk DR₁. These are each evaluated as LOW, MODERATE or HIGH. Using the audit risk model the auditor evaluates the achievable audit risk AR₁. (Note that in some instances, it may not be possible to distinguish between inherent risk and control risk. In such an instance, the combined risk RMM₁ (the risk of material misstatement) is evaluated.)

  For example, assume, based on the nature of the entity's business and operations, its control environment as well as the audit firm's independence and competence, that IR₁, CR₁ and DR₁ are evaluated as HIGH, MODERATE and LOW respectively. Using the audit risk model, AR₁ is evaluated as LOW.

Finally the auditor evaluates whether he/ she has gathered evidence of sufficient quantity and appropriate quality, based on both its relevance and reliability, to make the accept/ retain decision. If not, further evidence is gathered.

After the auditor has concluded the estimations and evaluations above, the accept/retain (reject/relinquish) decision is made. Refer to the next activity.

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