Activity Based Risk Evaluation Model of Auditing

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Opinion formulation stage: Evidence gathering:
Consistency of the financial statements with the auditor's knowledge of the entity

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

During the opinion formulation stage, auditors gather evidence in relation to the consistency of the financial statements with the auditor's knowledge of the entity which enables the auditor to subsequently evaluate, for each material financial statement item:

• acceptable audit risk, AR*₅. The auditor gathers evidence of any increased or reduced reliance expected to be placed on the financial statement item.
• achievable audit risk, AR₅. The auditor gathers evidence of any misstatements in the financial statement item other than those previously detected in underlying account balances. These other misstatements mainly relate to misstatements in the accuracy of presentation and disclosure of the financial statement item.

Activities employed to gather this evidence include inquiry and analytical procedures such as ratio analysis , review and common size analysis .

After the evidence is gathered, the auditor evaluates the evidence, and in particular, evaluates the (achievable) audit risk at the financial statement level AR₅ for subsequent comparison with the acceptable audit risk AR*₅. Refer to the next activity.

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