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Whether business risk & financial statement risk are types of Audit risk & whether inherent risk is known as business risk or financial statement risk.??
Business risk is not on the F8 syllabus and is not directly do to with audit risk.
Audit risk is the risk that an inappropriate audit opinion is given ie there is a material misstatement in the FS but the audit opinion is unmodified (‘clean’).
For that to happen, there must be an error in the Financial Statements (sometime called financial statement risk) that hasn’t been picked up by the auditors (detection risk)
For an error to occur in the financial statements it must have occurred in the first place (inherent risk) and then not picked up by the internal control system (control risk).
So:
The risk of a misstatement in the FS = Inherent risk x control risk
The risk of an inappropriate audit opinion, audit risk = inherent risk x control risk x detection risk.
when audit risk is that an inappropriate audit opinion is given, that may be due to auditor is unable to detect material misstatement, so audit risk is just equal to detection risk,
then why audit risk is equal to inherent risk *control risk *detection risk .??But detection can only detect errors that have occurred.
If there is little risk that an error has occurred and being incorporated in the FS (low inherent risk and low control risk), the auditor will do less work: the detection risk can be high.
If there is a high risk of an error having been included in the FS then the auditor has to do more work to ensure that these errors didn’t occur or that the auditor find them.
Look at the lectures on this topic.
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