Question

• What is meant by acceptable audit risk when performing the work of attestation, and what would be some of the characteristics of this risk?
• What type of evidence is collected when substantiating this type of audit risk, and why can this risk be material when reviewing the financial statements of a company?

Answer 1

Acceptable audit risk in attestation means the risk the auditor is willing to take responsibility for any misstatements in the reports attested by him. If the acceptable audit risk becomes high, then the audit evidence, based on which the attestation is made, will be collected less. Acceptable audit risk must not be very high as it might lead to many misstatements.

Few characteristics of this risk are ,It is inversely proportional to audit evidence collected. Inherent risk is one of the important factors in this risk. It is a risk of errors or frauds which is not by inadequate control systems, this kind of risk is high in case of newly established organisations. Materiality also affects the acceptable audit risk. Higher the acceptable audit risk , higher the chances of material misstatements.

Audit evidence has to be collected effectively as this decreases risk of misstatements. Those type of evidences should be collected which will ensure that the material items are verified. Evidences which ensure the decrease of frauds have to be collected.

This risk can be material in reviewing financial statements because of the factors involved in preparation of financial statements. There is a lot of professional judgement involved in preparation of financial statements, which affects the audit opinion a lot. The risk of errors and frauds are higher in this case due to many internal factors like inadequate controls, inadequate management.

Therefore Auditor has to adhere to the auditing principles while auditing financial statements or attesting , so that the risk can be reduced significantly.