Audit Risk

• Audit risk is the risk that an auditor will give an incorrect opinion.
• Auditors should reduce audit risk to an acceptably low level.
• Audit risk formula is: Audit Risk = Inherent risk x Control Risk x Detection Risk.
• Inherent risk is the risk of susceptibility of account balance in the absence of control.
• Control risk is the risk that internal controls will not prevent, detect or correct material misstatements.
• Detection risk is the risk that an auditor will fail to detect misstatements.
• Assessment of inherent risk occurs in the planning stage of an audit.
• Assessment of control risk occurs in the internal control stage of an audit.
• Assessment of detection risk occurs in the substantive testing stage of an audit.
• Setting the desired level of audit risk can be done at either 1%, 5% or 10%.
• Assessment of inherent risk and control risk involves risk assessment procedures such as inquiry, observation, inspection, and analytical procedures.
• Setting the acceptance level of detection risk involves considering the nature, timing, and extent of audit procedures.
• If the assessment of inherent risk and control risk is high, the detection risk should be low.
• If the assessment of inherent risk and control risk is low, the detection risk should be high.