Audit risk

Audit risk is the possibility that the auditor may give an inappropriate opinion on the financial statements. That is he may give an unqualified opinion in a situation that required a qualified opinion. It can be split into three distinct risks as follows:

Inherent risks

This is the susceptibility of an account balance in a class of transactions to material misstatement, either individually or when aggregated with misstatement in other balances irrespective of the related internal controls.

Auditors are suspicious that these items are misstated because of their inherent characteristics for instance if they are estimates or important items in the financial statements. Examples could be stock, depreciation, cash among others.

Control risks

This is the risk that a misstatement will occur in an account balance which could be material either individually or when aggregated with misstatements of other balances and could not be detected on a timely basis by the accounting system and internal control system.

Detection risk

This is possibility that the auditors substantive procedures will not detect a misstatement that exist in an account balance that could be material either individually or aggregated with misstatements in other balances. Lack of audit risk management may jeopardize audit quality.