Question

Describe detection risk as it applies to the misguided use of internal controls by management to cover up their fraudulent acts.

Answer 1

Detection risk - lt is a type of audit risk. It occurs when an auditor did not find material misstatement in company's financial statements. It is acceptable at certain level but auditor's goal is to lower the detection risk sufficiently. Detection risk can reach unacceptable level when an auditor fails to implement the correct audit proceduresprocedures, implement the right procedures incorrectly or fails to judge the results correctly.

To minimize the detection risk auditors must implement the correct audit procedures.

There three main components that affect the detection risk are as follows :-

1. Follow an audit procedure not correctly.

2. Audit testing method adoption is incorrect.

3. Evaluation of results incorrectly.

Management can also use these type of detection risk to cover up their fraudulent acts.

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