Hi @Globetrotter,
See the following excerpt from PCAOB AU 312:
“The auditor needs to consider audit risk at the individual account-balance or class-of-transactions level because such consideration directly assists in determining the scope of auditing procedures for the balance or class and related assertions. The auditor should seek to restrict audit risk at the individual balance or class level in such a way that will enable him or her, at the completion of the audit, to express an opinion on the financial statements taken as a whole at an appropriately low level of audit risk.”
Yes, audit risk is done at the individual and class level, but contributes to audit risk as a whole. Ie. we want the collective audit risk to be sufficiently low such that overall audit risk (risk of incorrect opinion) is minimal. Perhaps, audit risk could be adjusted, but it would be unusual once an engagement starts. Let me explain why:
Audit Risk= Inherent Risk x Control Risk x Detection Risk, (Also can be shown as risk of material misstatement x detection risk)
1. Auditor sets audit risk (will be low and may be qualitative or quantitative)
2. Auditor assesses inherent risk (the likelihood account contains a material misstatement)
3. Auditor assesses control risk (are controls in place and would they detect or prevent misstatement)
4. Determine detection risk (the auditor changes the likelihood they will catch misstatement by nature and type of procedures/testing)
The auditor has no control over 2 and 3. Thus they set the audit risk desired and adjust detection risk to reach the desired level of audit risk. The higher inherent risk or control risk are, the lower detection risk needs to be.
Much more likely is that detection risk will be adjusted during the audit. If CR or IR are higher than expected, the auditor will lower the acceptable DR to maintain the low AR. If CR or IR are assessed as lower than anticipated, the auditor may be willing to raise DR if they believe they can still achieve the same AR.
Let me know if this makes sense.
Chandler
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