Explain, in General, How the Auditor Chooses (In Percentage) Audit

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The Answer is In theory, audit risk (any risk, in fact) could vary from 0 percent (complete certainty that financial statements do not contain material misstatements) to 100 percent (complete certainty that financial statements contain material misstatements). However, the auditor must design the engagement to provide reasonable assurance that financial statements are free of material misstatement. Reasonable assurance implies a high level of assurance, and a low probability of misstatement. Therefore, most auditing firms require that engagements are conducted at relatively low audit risk percentages, usually no higher than 5 percent. Because an auditor cannot perform tests on all transactions and accounts, and because significant judgment is required for many financial statement measures, conventional wisdom suggests that an audit cannot be performed with an audit risk level below 1 percent. Thus, for most firms, audit risk is established somewhere between 1 and 5 percent. In practice, the costs associated with moving below 1 percent typically are very high relative to the reduction in audit risk.
The auditor must consider the audit firm's business risk when setting an acceptable audit risk. If the client is in financial distress or publicly listed and thus capable of drawing a class action suit, litigation and reputation risk will increase, thereby increasing auditor business risk and thus the auditor will want to reduce the acceptable audit risk. Since audit risk is premised on a level of materiality which is a user defined concept, it is important to understand who will be using the financial statements upon which the opinion will be expressed. For example, creditors and investors are focusing on different aspects of the financial statements.

Explain, in General, How the Auditor Chooses (In Percentage) Audit

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