What Are The Three Types Of Audit Risk?

Auditing is the process of examining the financial statements of a company. Usually, external auditors con
the auditee company. The process of auditing consists of many different procedures that auditors perform
are prepared in conformity with the applicable financial reporting framework. Some companies may also ha
may also audit its financial statements and also work on its internal controls.

The audit process requires auditors to examine not only the financial statements of a company but also the
statements. During the process, auditors can apply different procedures to obtain audit evidence to form a
procedures, there are some other steps they must perform. These may include determining the risks. The
issues. Auditors must understand the risks involved in the auditing process and how to deal with them acco

Table Of Contents
What Are the Audit Risks?
Why Do We Need to Know the Audit Risks?
3 Types of Audit Risks
Inherent Risk
Control Risk
Detection Risk
Audit Risk Model
How Does Audit Risk Affect the Audit Strategy?
How to Minimize Audit Risk?
Conclusion

What Are The Audit Risks?

According to ISA 200 – Overall Objectives of the Independent Auditor and the Conduct of an Audit in Acco
inappropriate audit opinion when the financial statements are materially misstated”. It means audit risk is th
of a company are materially misstated.
ISA 200 also states, “To obtain reasonable assurance, the auditor shall obtain sufficient appropriate audit
draw reasonable conclusions on which to base the auditor’s opinion”. Therefore, the standard requires aud
minimized.

Why Do We Need To Know The Audit Risks?

The reason why managing and understanding audit risk is crucial for auditors is that the stakeholders of a
with the company. In case of a misjudgment on the auditors’ part, they may end up making wrong decision
up taking legal action against the audit firm for their incorrect opinion.
Identifying and assessing the audit risks of an audit assignment is also vital for auditors because the risk d
audit evidence. The audit risk at each client will be different due to different factors. Therefore, auditors mu
a minimum. It also helps auditors avoid any unnecessary audit procedures that may qualify as over-auditin
3 Types Of Audit Risks
Audit risk consists of three types. Knowing the different types of audit risks also helps auditors understand
audit risk are inherent risk, control risk, and detection risk. Inherent risk and control risk combined is also k
of a company are materially misstatement before the audit.
Inherent Risk
The inherent risk is one of the 3 types of audit risk. It is the risk that the financial statements of a company
the type of audit risk that arises in the audit process due to the nature of the auditee company and is not af
auditor. In simpler words, inherent risk is the susceptibility of an account balance or a transaction to missta

Inherent risk is the main type of audit risk as it comes before the other types. For example, a company that
to inherent risk as compared to another company that has relatively simple transactions. Usually, the more
involved will be for the audit process.

Inherent risk is a type of audit risk that auditors cannot reduce as it is related to the nature of the company
plan audit procedures according to their assessment of the risk. That means if the auditor considers the inh
overall audit risk of the company.
Control Risk
Control risk is another risk among the 3 types of audit risk. It is the type of audit risk that relates to the inter
the company fail to prevent or detect within its financial statements. After inherent risk, control risk is the ne
may exist due to the nature of its operations and environment. Therefore, control risk is also outside the co

The control risk of an audit assignment depends on the auditors’ assessment of the internal controls of a c
company. Assessing the internal controls of a company also requires auditors to have a strong understand
the assessment is to determine whether the controls in place can prevent or detect material misstatements

Inherent risk and control risk are closely related and together make up the risk of material misstatement. W
control risk. As mentioned above, auditors cannot control the inherent or control risk of an audit assignmen
control risk of the audit assignment is low.

Detection Risk
While inherent and control risk depends on the nature and internal controls of the auditee company, detect
detect existing material misstatements in the financial statements of a company. This type of audit risk occ

Many factors contribute to a high detection risk. For example, improper audit planning, audit procedures or
inherent and control risks,  auditors can directly control the detection risk. Usually, auditors decide the dete
Audit Risk Model
An audit risk model is a tool that auditors can apply to quantify the audit risk involved in an assignment. It a
to this model, the overall audit risk of an audit assignment is the product of the 3 types of audit risk namely

As mentioned above, inherent and control risks are also known as the risk of material misstatement. There

While the tool allows auditors to assess the audit risk of an engagement, it still requires some judgment fro
Often, auditors need to use professional judgment to assess each type of risk and assign value to it.
How Does Audit Risk Affect The Audit Strategy?
There are many ways in which the audit risk of an assignment can affect the audit strategy used by auditor
determine the level of audit procedures they need to perform to form an opinion. Similarly, audit risk also p
materiality can also dictate the procedures that auditors must undertake to ensure they give a proper opini
The rule for audit risk affecting the audit strategy is simple. The higher the audit risk of an assignment is, th
taken by auditors to complete the audit.
How To Minimize Audit Risk?
While auditors cannot control the inherent and control risk of an audit assignment, they can control detectio
audit risk. There are different ways in which auditors can minimize detection risk. These include the followi
Using proper audit planning.
Applying appropriate audit procedures.
Monitoring and supervising their work.
Ensuring proper documentation is made.
Having a robust review process.
Using professional and competent staff for audit assignments.
By allocating staff depending on their skills and experience.
Using professional skepticism during audits.
While the above is not an exhaustive list, it should give auditors a decent idea of how to minimize audit risk
Conclusion
Audit risk is the risk that an auditor expresses an unmodified opinion despite material misstatements in the
detection risks. Auditors can also use the audit risk model to quantify the risk of an assignment. Assessing
auditors undertake. To minimize audit risks, auditors must focus on reducing detection risks.