Audit risk (also referred to as residual risk) as per
ISA 200 refers to the risk that the auditor expresses an inappropriate opinion when the financial statements are materiality misstated. This risk is composed of:
*
Inherent risk (IR), the risk involved in the nature of business or transaction. Example, transactions involving exchange of cash may have higher IR than transactions involving settlement by cheques. The term ''inherent risk'' may have other definitions in other contexts.;
*Control risk (CR), the risk that a misstatement may not be prevented or detected and corrected due to weakness in the entity's
internal control Internal control, as defined by accounting and auditing, is a process for assuring of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. A broad ...
mechanism. Example, control risk assessment may be higher in an entity where
separation of duties
Separation of duties (SoD), also known as segregation of duties is the concept of having more than one person required to complete a task. It is an administrative control used by organisations to prevent fraud, sabotage, theft, misuse of informati ...
is not well defined; and
*
Detection risk (DR), the probability that the auditing procedures may fail to detect existence of a material error or fraud. Detection risk may be due to
sampling error
In statistics, sampling errors are incurred when the statistical characteristics of a population are estimated from a subset, or sample, of that population. Since the sample does not include all members of the population, statistics of the sample ( ...
or
non-sampling error.
Audit risk can be calculated as:
:AR = IR × CR × DR
See also
*
Risk-based auditing
References
Non-inline references
* Srivastava R.P. & Shafer G.R. (1992) " Belief function Formula for audit risk " Review: Accounting Review, Vol. 67 n° 2, pp. 249–283, for evidence theory applied on audit risk.
* Lesage (1999)" Evaluation du risque d'audit : proposition d'un modele linguistique " Review: Comptabilite, Controle, Audit, Tome 5, Vol. 2, September 1999, pp. 107–126, for fuzzy audit risk.
* Fendri-Kharrat ''et al.'' (2005)"Logique floue appliquee a l'inference du risque inherent en audit financier ", Review: RNTI : Revue des Nouvelles Technologies de l'Information, n° RNTI-E-5, (extraction des connaissances: etats et perspectives), November 2005, pp. 37–49, Cepadues editions, for fuzzy inherent audit risk.
External links
A technical explanation of this term can be found in International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB)of the
International Federation of Accountants
The International Federation of Accountants (IFAC) is the global advocacy organization for the accountancy profession; mainly for the financial accounting and auditing professions. Founded in 1977, IFAC has more than 175 members and associates i ...
{{DEFAULTSORT:Audit Risk
Auditing
Auditing terms