Audit risk
Audit risk is the risk that the auditor expresses an inappropriate opinion when financial statements are materially misstated. It is a function of the risks of material misstatement and detection risk. The auditor assesses risks and designs work to reduce audit risk to an acceptably low level; the audit cannot remove all risk. Risk of material misstatement exists before audit procedures and includes inherent and control risk. Detection risk concerns the auditor’s procedures failing to detect a misstatement that exists. Greater assessed misstatement risk generally calls for a response that reduces detection risk.
Worked example
In a simplified teaching model, if inherent risk is 80% and control risk 50%, the combined risk of material misstatement is 40%. To target 4% audit risk, detection risk would be 4% ÷ 40% = 10%. Actual assessments involve judgement and are not required to be quantified.
Common mistake
Audit risk is not simply the risk that the entity makes a loss, nor is it the same as the risk of material misstatement.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AA | Direct | September 2026–June 2027 |
| ACCA | AAA (INT) | Direct | September 2026–June 2027 |