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audit risk


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The risk that an auditor fails to qualify the auditors’ report when the financial statements are materially misleading, i.e. do not give a true and fair view. The audit risk consists of three components: the inherent risk, i.e. the likelihood of misstatements occurring in the absence of controls; the control risk, i.e. the risk that misstatements may not be prevented or detected on a timely basis by the internal control system; the detection risk, i.e. the risk that the auditor’s substantive tests will not detect a misstatement that exists on an account balance or class of transactions.

the inherent risk, i.e. the likelihood of misstatements occurring in the absence of controls;

the control risk, i.e. the risk that misstatements may not be prevented or detected on a timely basis by the internal control system;

the detection risk, i.e. the risk that the auditor’s substantive tests will not detect a misstatement that exists on an account balance or class of transactions.

A quantification of each of these elements, when multiplied together, gives a measure of the audit risk. See also alpha risk and beta risk.

Subjects: Accounting.


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