WHAT IS AUDIT RISK?

 


Audit risk is the risk of giving a wrong opinion by an independent auditor on client`s financial statements. In other words audit risk is a risk that financial statements are materially misstated  and audit tests failed to identified these mistakes.

There are two reasons for the risk that financial statements are materially misstated.

The first reason is inherent risk which is determined by complicity of the company operations, economic situation of company, specific of company, the industry it operates, technological development, engagement in new markets or products.

The second reason is control risk which means that company internal control system cannot prevent risks of material misstatements in financial statements.

When it is said about the failure of audit tests to spot the material mistakes in financial statements, they mean detection risk. In other words, detection risk connects with the nature, timing and extent of the auditor’s procedures implementing by the auditor to get audit evidence.

The main reasons why audit tests failed to identified mistakes could be following: improper assignment of personnel to the engagement team, using unrepresentative sample, improper supervision and review of the audit work performed.

In order to tackle with these three types of risks the auditors do following things: 

  • Assess of the inherent risk. 
  • Assess and test of internal control system of client. 
  • If inherent and control risk are high, auditors decrease detection risk by increasing substantive procedures.

So, audit risk is important tool for obtaining audit evidences and forming audit opinion on financial statements.

ISA 200 about audit risk




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