What is Audit risk and it's types

Question

Accepted Answer

Audit risk is the risk that an auditor expresses an inappropriate opinion on financial statements. It has two types: inherent and control risk.

Audit risk is the risk that an auditor will not detect material misstatements in the financial statements.
Inherent risk is the risk of material misstatement in the absence of any internal control.
Control risk is the risk that a material misstatement will not be prevented or detected by the entity's internal control.
Audit risk is the product of inherent risk, control risk, and detection risk.
Detection risk is the risk that the auditor will not detect a material misstatement even though it exists.
For example, if a company has weak internal controls over financial reporting, the control risk will be high, which will increase the overall audit risk.
To mitigate audit risk, auditors perform various audit procedures to obtain sufficient and appropriate audit evidence.
Auditors also assess the entity's internal control to determine the level of control risk.
The higher the inherent and control risks, the lower the acceptable level of detection risk should be.
Audit risk is a subjective assessment and cannot be eliminated completely.

Popular interview questions of Statutory Auditor