All you need to know about Audit Risks

| Last updated: 27 February 2021

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Quick Summary

Audit risk refers to the possibility that an auditor fails to identify errors or fraud, leading to undetected material misstatements. This can occur due to control weaknesses, auditor oversight, or the inherent nature of a business. While audit risk cannot be entirely eliminated, it can be significantly minimised through a well-executed, risk-based auditing approach.

What is an audit risk?

Audit risk is a risk that an auditor will not detect errors or fraud while examining the information collected and a material misstatement may go undetected. This means that it is possible that despite all the checks and detailed review, certain misstatement sweeps through the leakage.

Audit Risks: What They Are and How to Minimise Them

Following are the types of audits risks

Control risk

It is possible that the material error goes undetected by the existing controls. Eg: - An unidentified person can enter the premises of an organization by tailgating despite existence of entry controls at the entry gate.

Detection risk

The risk that the auditor missed to detect material errors or misstatements. This may be due to oversight or negligence by the auditor.

Inherent risk

Inherent risk exists because of the nature of the business. It's the risk that exists without considering the controls. Eg: Petroleum refinery has an inherent risk of fire.