Relationship between Audit Risk and Audit Evidence

Relationship between Audit Risk and Audit Evidence

• inverse relationship between acceptable audit risk & evidence.
• The lower the level of audit risk to be achieved, the greater amount of evidence is needed
• Inherent risk and control risk however, has direct relationship with audit evidence.

First, short recap:

• Audit risk = risk the auditor gives a wrong opinion on materially misstated financial statements.
• To reduce audit risk, the auditor needs sufficient appropriate audit evidence.

So the relationship is basically:

The lower the acceptable audit risk, the more and better audit evidence the auditor must obtain.

1. Inverse Relationship

If the auditor wants LOW audit risk (very confident in the opinion):

➜ Auditor must collect MORE evidence and HIGHER QUALITY evidence.

• Larger sample size
• More substantive tests
• Use more reliable sources (external confirmations, bank statements, etc.)

If the auditor can accept a slightly HIGHER audit risk (still acceptable):

➜ Auditor may collect LESS evidence.

• Smaller sample size
• Fewer procedures
• More reliance on internal controls

So:

Acceptable audit risk ↓ ⇒ Evidence needed ↑

Acceptable audit risk ↑ ⇒ Evidence needed ↓

2. Link with Detection Risk

Remember:

AR = IR × CR × DR

• Detection Risk (DR) = risk that auditor’s procedures fail to detect a material misstatement.
• More evidence → lower detection risk → lower overall audit risk.
• Less evidence → higher detection risk → higher audit risk.

So, when inherent risk and control risk are high, the auditor:

• Must reduce detection risk
• Therefore must collect more, better-quality evidence.

3. Exam-style Short Answer (You Can Use This)

There is an inverse relationship between acceptable audit risk and the amount of audit evidence required. 

When the auditor wants audit risk to be low, detection risk must also be low, so the auditor must obtain more sufficient and appropriate evidence (for example, larger samples and more reliable procedures). 

If the auditor accepts a higher audit risk, less evidence may be collected. Therefore, the level of acceptable audit risk directly affects the nature, timing and extent of audit evidence.