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.
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.
How do you minimize the audit-risk?
You cannot eliminate the audit risk completely but can be mitigated by effective risk-based auditing.
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