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Audit risk means the risk that the auditor may give an inappropriate audit opinion i.e. the auditor may
report that the financial statements show a true and fair view while in reality they are materially misstated.
Audit risk is composed of:
a) Inherent risk
This is the risk that the account balances are transactions could be materially misstated assuming
that there were no internal control system. Inherent risk could increase a result of an adverse
attitude of managers on the internal control system i.e. if they view internal control system as
unimportant.
b) Control risk
This is the risk that a material misstatement could occur in an account balance or clan of
transactions which will not be prevented or detected in a timely manner by the entity’s accounting
and internal control system.
c) Detection risk
This is the risk that the auditor’s tests of balances and transactions will not detect a material
misstatement that exists in an accounts balance or class of transactions. This implies that
detection risk is the only component of audit risk under the auditor’s control.
Wilfykil answered the question on April 11, 2019 at 11:46
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