Main Type of Audit Risk

 Which Three Types of Audit Risk Exist?



Audit risk can be divided into three categories: inherent risk, detection risk, and control risk.

1) Inherent Risk: The risk created by a financial statement inaccuracy or omission caused by something other than an internal control failure is known as inherent risk. When a transaction is complex or there are special conditions that call for a high level of financial estimation judgment, the chance of inherent risk in a financial audit rises. This type of risk indicates the worst possible scenario because all internal controls have nonetheless proved ineffectual.

2) Detection Risk: The risk of detection is the likelihood that an auditor may miss significant inaccuracies in the financial statements of a business. These false remarks could be the result of fraud or mistake. Audit processes are used by auditors to find these inaccuracies. However, some discovery risk will always remain due to the nature of audit techniques. For instance, because it is impractical to review every transaction, auditors usually sample a specific type of company activity. There is always some danger, even though expanding the sample size can reduce the likelihood of discovery.

3)Control Risk: Control risk refers to the possibility that a substantial misstatement resulting from fraud or error in an assertion, either alone or in conjunction with other material misstatements, won't be promptly prevented or discovered by the company's internal control.

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