In short
Audit risk is the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated. It depends on the risk of material misstatement (inherent and control risk) and detection risk.
Key takeaways
- Audit risk = inherent risk × control risk × detection risk.
- The auditor assesses inherent and control risk and controls detection risk through the nature, timing and extent of procedures.
- The higher the assessed risk of material misstatement, the lower the acceptable detection risk and the more persuasive the evidence needed.
Example
Acceptable audit risk 5%, inherent risk 50%, control risk 40%: acceptable detection risk is 5% ÷ 20% = 25%.
Where it's tested
AUD: Assessing Risk of Material Misstatement — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A client operates with weak segregation of duties over its cash disbursement process. All else equal, how should the auditor respond?