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The auditor must plan and perform the audit to reduce the audit risk to an acceptably low level
that is consistent with the objective of an audit (ISA 200).
The audit risk depends on: Inherent, Control and Detection Risk.
Quantified Audit risk: AR=IR x CR x DR, therefore: DR =
AR
IR x CR
The design of Substantive Procedures will depend on the level of the detection risk. A low
level of detection risk will require a predominantly substantive audit strategy.
Relationship between audit strategy, detection risk and level of substantive procedures
11
22
Nature
Timing and
Extent
Nature
Refers to the type and effectiveness of the auditing procedures, i.e.
Analytical procedures
Tests of details of transactions
Tests of details of balances
Analytical procedures
These involve detailed, analytical controls. For example in a hotel audit, where most revenue is
billed to many customers and in many instances, appropriate tests should be applied,
although they may be tedious and costly. At an aggregate level these can be estimated a a
multiple of room occupancy and average customer spending. At a detailed level it may be
necessary to conduct sample audits to specific time periods and departments.
Extend
The amount of evidence obtained can vary by changing the extent of substantive procedures.
The extent relates to the size of the samples selected.
Risk components and the nature, timing and extent of substantive procedures