4-2 two terms

Before beginning our discussion, we briefly introduce two risk terms:acceptance risk and inherent risk. These two risks significantly influence the conduct and cost of audits. Much of the early planning of audits deals with obtaining information to help auditors assess these risks.

Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued. When the auditor decides on a lower acceptable audit risk, it means that the auditor wants to be more certain that the financial statement s are not materially misstated. Zero risk is certainty, and a 100 percent risk is complete uncertainty. 

Inherent risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal ocntrol. If, for example, the auditor concludes that there is a high likelhood of material misstatement in accounts receivable due to changing economic conditions, the auditor concludes that inherent risk for accounts receivable s high

Assessing acceptable audit risk and inherent risk is an important part of audit planning because it helps determine the amount of evidence that will need to be accumulated and staff assigned to the engagement. For example, if inherent risk for inventory is high because of complex valuation issues, more evidence will be accumulated in the audit of inventory, and more experienced staff will be assigned to perform testing in this area.