Document ID: chunk:federal_register_of_legislation:F2022C01186:reg:14:p18
Version: federal_register_of_legislation:F2022C01186
Segment Type: reg
Provision Reference: reg 14 (pt 18/30)
Character Range: 63360–66362

function of the risks of material misstatement and detection risk.  The assessment of risks is based on audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit.  The assessment of risks is a matter of professional judgement, rather than a matter capable of precise measurement.

A36.         For purposes of the Australian Auditing Standards, audit risk does not include the risk that the auditor might express an opinion that the financial report is materially misstated when they are not.  This risk is ordinarily insignificant.  Further, audit risk is a technical term related to the process of auditing; it does not refer to the auditor's business risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of a financial report.

Risks of Material Misstatement

A37.         The risks of material misstatement may exist at two levels:

           * The overall financial report level; and

           * The assertion level for classes of transactions, account balances, and disclosures.

A38.         Risks of material misstatement at the overall financial report level refer to risks of material misstatement that relate pervasively to the financial report as a whole and potentially affect many assertions.

A39.         Risks of material misstatement at the assertion level are assessed in order to determine the nature, timing, and extent of further audit procedures necessary to obtain sufficient appropriate audit evidence.  This evidence enables the auditor to express an opinion on the financial report at an acceptably low level of audit risk.  Auditors use various approaches to accomplish the objective of assessing the risks of material misstatement.  For example, the auditor may make use of a model that expresses the general relationship of the components of audit risk in mathematical terms to arrive at an acceptable level of detection risk.  Some auditors find such a model to be useful when planning audit procedures.

A40.         The risks of material misstatement at the assertion level consist of two components: inherent risk and control risk.  Inherent risk and control risk are the entity's risks; they exist independently of the audit of the financial report.

A41.         Inherent risk is influenced by inherent risk factors.  Depending on the degree to which the inherent risk factors affect the susceptibility to misstatement of an assertion, the level of inherent risk varies on a scale that is referred to as the spectrum of inherent risk. The auditor determines significant classes of transactions, account balances and disclosures, and their relevant assertions, as part of the process of identifying and assessing the risks of material misstatement. For example, account balances consisting of amounts derived from accounting estimates that are subject to significant estimation uncertainty may be identified as significant account balances, and the auditor's