Document ID: chunk:federal_register_of_legislation:F2022C01186:reg:14:p20
Version: federal_register_of_legislation:F2022C01186
Segment Type: reg
Provision Reference: reg 14 (pt 20/30)
Character Range: 68888–71930

315 establishes requirements and provides guidance on identifying and assessing the risks of material misstatement at the financial report and assertion levels.

A46.         Risks of material misstatement are assessed at the assertion level in order to determine the nature, timing and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence.[22]

Detection Risk

A47.         For a given level of audit risk, the acceptable level of detection risk bears an inverse relationship to the assessed risks of material misstatement at the assertion level.  For example, the greater the risks of material misstatement the auditor believes exists, the less the detection risk that can be accepted and, accordingly, the more persuasive the audit evidence required by the auditor.

A48.         Detection risk relates to the nature, timing, and extent of the auditor's procedures that are determined by the auditor to reduce audit risk to an acceptably low level.  It is therefore a function of the effectiveness of an audit procedure and of its application by the auditor.  Matters such as:

           * Adequate planning;

           * Proper assignment of personnel to the engagement team;

           * The application of professional scepticism; and

           * Supervision and review of the audit work performed,

    assist to enhance the effectiveness of an audit procedure and of its application and reduce the possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit procedure, or misinterpret the audit results.

A49.         ASA 300[23] and ASA 330 establish requirements and provide guidance on planning an audit of a financial report and the auditor's responses to assessed risks.  Detection risk, however, can only be reduced, not eliminated, because of the inherent limitations of an audit.  Accordingly, some detection risk will always exist.

Inherent Limitations of an Audit

A50.         The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial report is free from material misstatement due to fraud or error.  This is because there are inherent limitations of an audit, which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor's opinion being persuasive rather than conclusive.  The inherent limitations of an audit arise from:

           * The nature of financial reporting;

           * The nature of audit procedures; and

           * The need for the audit to be conducted within a reasonable period of time and at a reasonable cost.

The Nature of Financial Reporting

A51.         The preparation of a financial report involves judgement by management in applying the requirements of the entity's applicable financial reporting framework to the facts and circumstances of the entity.  In addition, many financial report items involve subjective decisions or assessments or a degree of uncertainty, and there