AUDIT RISK

AUDIT RISK

•Audit risk is the risk that •The auditor will express

the auditor expresses an an inappropriate opinion if
inappropriate opinion the financial statements
when the financial are materially misstated
statements are materially and they fail to detect that
misstated. misstatement.
Detection risk

•Detection risk is 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 that could
be material.
•Detection risk is the only element of audit risk that that
auditor can influence as the risks of material
misstatement are created by the client when they
prepare the financial statements or process transactions
during the year.
 The only way the auditor can reduce audit risk is by reducing
detection risk. Detection risk can be reduced by:

1. Emphasising the need for professional scepticism.

How to avoid 2. Assigning more experienced staff to complex or risky areas of the
engagement.
detention risk
3. Changing the nature, timing and extent of direction and
supervision of members of the engagement team and the review of
work performed.

4. Incorporating additional elements of unpredictability in the

selection of further audit procedures.
 Risk of material misstatement

A risk of material
Risk of material
misstatement exists when
misstatement is the risk the
there is a reasonable
financial statements are
possibility of a misstatement
materially misstated prior to
occurring and it being
the audit.
material if it were to occur.
1. Inherent 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, before
consideration of any related controls.
• Inherent risk factors may be qualitative or quantitative.

2. Control risk:
• Control risk is the risk that a misstatement that could occur will not be prevented,
or detected and corrected, on a timely basis by the entity’s controls.
• If the client’s internal controls are not effective or adequate, transactions
processed during the year may contain fraud or error, resulting in misstatement.
THANK YOU