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Audit Risk
When auditors give an opinion on the truth and fairness of any financial statements, there is a natural risk that this assessment may not be entirely accurate. This risk is defined as the risk that auditors may give an inappropriate audit opinion on financial statements1. When coming to an opinion on a financial statement, the auditor must first decide on the level of risk which they are willing to accept. This audit risk is made up from three distinct parts:
Inherent risk,
Control risk, and
Detection risk.
Detection risk can be further broken down into:
Analytical risk, and
Substantive risk.
The final audit risk is then calculated with the following formula:
If the final audit risk is greater than the acceptable level of risk, the auditor must identify areas which can be investigated further in order to reduce this risk to, or below, the acceptable level.
Approximate Word count = 716
Approximate Pages = 2.9
(250 words per page double spaced)
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