Activity Based Risk Evaluation Model of Auditing

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Opinion formulation stage: decision making:
Audit opinion

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

At the conclusion of the opinion formulation stage, the auditor determines the appropriate audit opinion to be issued on the financial statements of the client.

A comparison of the (achievable) audit risk, AR₅ for each material financial statement item, with the evaluation of the acceptable audit risk, AR*₅, assists the auditor in arriving at the appropriate audit opinion.

If AR₅ is greater than AR*₅, then the auditor may determine that there is an unacceptable risk that the audited financial statement item is materially misstated. If not, the auditor determines that the risk is acceptable.

In addition, the auditor considers the aggregate of all misstatements detected. Where the value of the aggregated misstatements is less than the value of reporting materiality, and the risk for all financial statement items is acceptable, the auditor issues an unqualified audit opinion on the financial statements; where the value of the aggregated misstatements exceeds the value of reporting materiality or the risk for any one financial statement item is not acceptable, the auditor issues either, or a combination of, an exception opinion or/ and an adverse opinion ^[fn]. Alternatively, if the auditor is unable to gather evidence of sufficient quantity or appropriate quality to form an opinion on the financial statements, the auditor may express his/her inability to form an opinion.

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