Activity Based Risk Evaluation Model of Auditing

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Substantive testing stage: decision making:
Conclusion on individual account balances

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 substantive testing stage, the decision making activity is the activity of concluding about the extent to which individual account balances are materially misstated.

A comparison of the (achievable) audit risk, AR₄, with the (revised) evaluation of the acceptable audit risk, AR*₄, assists the auditor in arriving at a conclusion about the completeness, validity and accuracy of individual account balances.

If, for an individual account balance assertion, AR₄ is less than or equal to AR*₄, then the auditor may conclude that there is an acceptable risk that the audited account balance is not materially misstated. Otherwise, the auditor may conclude that the risk is unacceptable. In the latter instance, this will affect the achievable audit risk AR₅ evaluated by the auditor in the next, opinion formulation, stage of the audit.

The auditor notes all misstatements, whether material or not, in the audit working papers on a schedule of audit differences.

This completes the fourth audit stage. The next activity is that of operational planning in the opinion formulation stage.

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