Audit risk

Audit risk is defined as ‘the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of material misstatement and detection risk’. Hence, audit risk is made up of two components – risks of material misstatement and detection risk. Risk of material misstatement is defined as ‘the risk that the financial statements are materially misstated before the audit. This consists of two components... inherent risk ... control risk.’ Inherent risk is ‘the susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.’ Control risk is ‘the risk that a misstatement that could occur in an assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.’ Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.’ Audit risk questions require candidates to identify risks of material misstatements, including inherent and control risks and detection risks [ACCA Global]. There are three types of audit risk. The first is control risk, the risk of potential material misstatement not being detected or prevented by a client’s control systems. The second is detection risk, which is the risk that the audit procedures used cannot detect a material misstatement. The third is an inherent risk: a client's financial statements are susceptible to material misstatements [AccountingTools].

Sources:

Audit risk definition. AccountingTools. Retrieved from: https://www.accountingtools.com/articles/audit-risk

Audit risk | F8 Audit and Assurance. ACCA Global. Retrieved from: https://www.accaglobal.com/hk/en/student/exam-support-resources/fundamentals-exams-study-resources/f8/technical-articles/audit-risk0.html