Audit Risk and its components.

Question

Accepted Answer

Audit risk is the risk that the financial statements are materially misstated.

Audit risk consists of inherent risk, control risk, and detection risk.
Inherent risk is the risk of material misstatement before considering internal controls.
Control risk is the risk that a material misstatement could occur and not be prevented or detected on a timely basis by internal controls.
Detection risk is the risk that the auditor's procedures will not detect a material misstatement.
Audit risk is managed by adjusting the nature, timing, and extent of audit procedures.
For example, if a company operates in a highly regulated industry, inherent risk may be higher.
If a company has weak internal controls, control risk may be higher.
If the auditor plans to perform more substantive procedures, detection risk may be lower.

Accepted Answer

Audit Risk is the risk that auditor gives an unmodified opinion on financial statements when they are materially misstated. 
Audit Risk is the function of Risk of Material Misstatement and Detection Risk.
Risk of Material Misstatement is the function of Inherent risk and control risk.