Question

Audit Risk
What would be an example of inherent risk in a company where you have worked?
In your own words, give an explanation of detection risk.
What then is audit risk? (do not copy the explanation from the book)

Answer 1

• A business whose inventory becomes obsolete experiences high inherent risk. For example, any business that produces computers and video games becomes obsolete and hence has high inherent risk.
• Detection risk is the risk that the auditor fails to detect material misstatements that exists in an organization's Financial statements. For example, auditors audit on a sampling basis because examining every transaction is not practical, hence there is a high chance of detection risk.
• Audit risk refers to risk that the auditors might deliver an unqualified report due to its failure of detection of material misstatements due to fraud or error. The risk comprises of inherent risk, the risk involved in the nature of business or transaction.