Table of Contents
- 1 How are detection risk and audit risk related?
- 2 What is the relationship of detection risk and control risk?
- 3 How is audit risk related to engagement risk?
- 4 How do inherent risk and control risk differ from detection risk?
- 5 Is inherent risk directly related to detection risk?
- 6 What is the meaning of detection risk?
- 7 How does inherent risk and control risk differ from detection risk?
- 8 How can an auditor reduce detection risk?
- 9 What is detection risk in auditing?
- 10 How do you calculate audit risk and control risk?
- 11 What is the difference between inherent risk and detection risk?
Detection risk is the chance that an auditor will fail to find material misstatements that exist in an entity’s financial statements. These misstatements may be due to either fraud or error. Detection risk is one of the three elements that comprise audit risk, the other two being inherent risk, and control risk.
What is the relationship of detection risk and control risk?
Control risk. This risk is caused by the failure of existing controls or the absence of controls, leading to incorrect financial statements. Detection risk. This risk is caused by the failure of the auditor to discover a material misstatement in the financial statements.
Is there an inverse relationship between audit risk and detection risk?
Detection Risk and quality of audit have an inverse relationship: if detection risk is high, lower the quality of audit and if detection risk is low, generally increase the quality of audit. …
Engagement risk refers the overall risk associated with an audit engagement and it consists of three components: client’s business risk, auditor’s business risk, and audit risk.
How do inherent risk and control risk differ from detection risk?
Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk relates to the auditor’s procedures and can be changed at his or her discretion. Detection risk should bear an inverse relationship to inherent and control risk.
What is planned detection risk?
Planned detection risk is the risk that audit evidence will fail to detect misstatements that exceed a tolerable amount. When an auditor reduces the planned detection risk, this will require the collection of more evidence. Conversely, if the auditor increases the planned risk, this will require less evidence.
The correct answer is: Inherent risk is inversely related to planned detection risk and directly related to planned evidence. Because the more the inherent risk is get high, the more the evidence the auditor need to check in order to mitigate the impact of inherent risk.
What is the meaning of detection risk?
Detection risk is defined as ‘the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements. ‘
What is the relationship of risk and materiality?
There is an inverse relationship between materiality and the level of audit risk, that is the higher the materiality level, the lower the audit risk and vice versa. Auditors take into account the inverse relationship between materiality and audit risk when determining the nature, timing and extent of audit procedures.
How does inherent risk and control risk differ from detection risk?
How can an auditor reduce detection risk?
The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. Examples of the tests that may be conducted are classification testing, completeness testing, occurrence testing, and valuation testing.
How is audit risk and materiality related?
There is an inverse relationship between materiality and the level of audit risk, that is the higher the materiality level, the lower the audit risk and vice versa. For example, if the audit is planned prior to the period end, auditors anticipate the results of operations and the financial position.
What is detection risk in auditing?
1 Detection risk occurs when an auditor fails to identify a material misstatement in a company’s financial statements. 2 There are three types of audit risk: detection risk, inherent risk, and control risk. 3 Auditors must implement correct audit procedures to limit detection risk.
How do you calculate audit risk and control risk?
The control risk for the audit may therefore be considered as high. If inherent risk and control risk are assumed to be 60\% each, detection risk has to be set at 27.8\% in order to prevent the overall audit risk from exceeding 10\%. Audit Risk = Inherent Risk x Control Risk x Detection Risk How does audit risk affect audit strategy?
What are the common causes of detection risk?
The common cause of detection risk is improper audit planning, poor engagement management, wrong audit methodology, low competency and lack of understanding of audit client. Detection risk is occurred because of auditor part rather than the client part.
What is the difference between inherent risk and detection risk?
Control risk. Detection risk. Inherent and control risk are the risks of material misstatement arising in the financial statements. These types of audit risk are dependent on the business, transactions and internal control system that the client has in place. On the other hand, detection risk is the risk that is dependent entirely on the auditors.