Category: 

What Is an Audit Risk?

Article Details
  • Written By: Kimberly Sernel
  • Edited By: J.T. Gale
  • Last Modified Date: 20 April 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Artists tend to grow up in wealthier households than doctors.  more...

April 24 ,  2005 :  The world's first cloned dog was born.  more...

Audit risk refers to the chance of an error slipping through an audit, usually a financial audit, and resulting in a flawed audit report. Generally, audit risk is represented by the following formula: Audit Risk (AR) = IR x CR x DR. In the formula, IR, or inherent risk, refers to the susceptibility of misstatement, assuming that there are no internal controls to counter that chance of misstatement. Control risk (CR) expresses the chance that internal controls won't catch a misstatement, and detection risk (DR) refers to the chances that the auditor won't detect the misstatement in his or her audit.

Depending on the resulting percentage that results from the audit risk formula, the audit risk for a particular audit is often characterized as high, medium, or low. What percentage range constitutes a high audit risk is not absolute — it depends on the particular factors of a given audit. Though this determination provides a definitive starting point in risk assessment, this tool is certainly not dispositive of actual audit risk.

Ad

During the planning stages of an audit, auditors typically will assess the various factors that can increase or decrease the audit risk associated with a particular engagement. When performing an initial risk assessment, auditors consider the risk of material misstatement both at the individual account balance level and for the financial statements taken as a whole. Mitigating risk factors, such as the experience of personnel, simplicity of the audited transactions and assertions, and the existing internal control framework, is a method used by auditors when assessing risk and developing the scope of the audit. Such considerations are used to define the materiality that will be the benchmark used by auditors when developing the nature, timing, and extent of the audit procedures over the financial information.

Materiality is considered to be the amount by which a user of the financial data, who has a reasonable understanding of the business, would have made a different decision had the information omitted or misstated been made available. The higher the perceived risk, the lower the materiality threshold — this results in an increased scope of testing. Guidelines outlined in the Generally Accepted Auditing Standards (GAAS) assist auditors in structuring their audit procedures to mitigate risk. GAAS are issued by the American Institute of Certified Public Accountants (AICPA) and create a high-level framework for auditors to use as a form of risk management to reduce the inherent risk associated with each engagement. Through the auditor's testing of the financial statement assertions, risk must be reduced to a level acceptable to the auditors before a clean audit opinion on the financial statements is provided.

Ad

Discuss this Article

accordion
Post 2

If you ever work for any sort of business or even short term program that receives government funding, you will find that the extent to which these groups often go to prevent account mistakes can be intense. However, it is true that human error cannot be entirely prevented, eve when you take the time to do things like assessing audit risk to prevent these errors. The next step is having a good plan for fixing errors.

hyrax53
Post 1

Many companies will double check or even triple check audit figures, because of the likelihood of audit risk. Considering the sheer amount of data involved in the audit of a large business operation, even the best accountant might make a mistake in accounts, and even the best auditor might make a mistake when looking over those accounts.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email