Activity Based Risk Evaluation Model of Auditing

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Opinion formulation stage: evidence evaluation:
AR*₅ ~ AR₅

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 the opinion formulation stage, and based on a, by now, very detailed knowledge of the client's business, the auditor evaluates the (achievable) audit risk at the financial statement level AR₅ for comparison with the corresponding acceptable audit risk AR*₅ and estimates whether audit evidence of sufficient quantity and appropriate quality has been gathered in order to provide an opinion on the financial statements.

Thus, for each material financial statement item, the auditor evaluates:

• acceptable audit risk, AR*₅. This is based on the value of AR*₄ of all account balance assertions underlying the financial statement item gathered in the previous audit stage, plus information gathered as to any increased or reduced reliance expected to be placed on the financial statement item. Depending on the extent of expected reliance, the risk is evaluated as VERY LOW (extensive reliance), LOW (moderate reliance), MODERATE (low reliance).
• (achievable) audit risk, AR₅. The auditor considers evidence gathered in the previous audit stage (of the value of AR₄ of all account balance assertions underlying the financial statement item) plus information gathered in this audit stage (of any further misstatements in the actual financial statement item). In particular, the auditor consider the concept of substance over form. Based on:
  • the extent of exceptions found within the financial statement item,
  • the value of reporting materiality,
  • the value of items comprising the financial statement item that the auditor has selected for examination, and
  • the total value of the financial statement item,
  the auditor evaluates the (achievable) audit risk for each financial statement item as VERY LOW, LOW , MODERATE or HIGH.

However, in this audit stage, practice differs from audit risk theory ^[fn].

In addition, the auditor evaluates whether he/ she has gathered evidence of sufficient quantity and appropriate quality, based on both its relevance and reliability, to provide the audit opinion. If not, the auditor gathers further evidence. After the auditor concludes the evaluations above, he/she will be in a position to make the audit opinion decision. Refer to the next activity.

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