Audit Risk Formula with Mixed Evidence

The financial statement audit is the process of collecting, evaluating, and aggregating relevant items of evidence pertaining to various management assertions related to the financial statement accounts to determine whether the company’s financial statements present fairly its financial position. The Dempster-Shafer theory [1] of belief functions has been argued to be an appropriate framework for representing uncertainties in the audit. This note extends Srivastava and Shafer [2] by deriving an audit risk formula under the Dempster-Shafer theory for more realistic situations where the auditor has mixed items of evidence. In their derivation, Srivastava and Shafer assume only positive evidence. In addition, their work is extended by considering interrelationships among the balance sheet accounts and the transaction streams accounts. Such interrelationships which are prominent in practice, were not considered by Srivastava and Shafer.