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Dear Mike,
I know its a simple question, but I need further clarification from you.
I know the definition of both risks. But need your further guidance how to identify the “Inherent Risk” & “Detection Risk” in an exam ?
I also read past papers, but still little confused ?
Kindly explain me in an easy way. if a you have an any brilliant example ?
Inherent risk is now only considered as a half of risk of material misstatement together with control risk
Inherent risk is faced by an entity simply because it IS and entity
You face no risk of a break down in credit control if you’re not in business
You’re not even faced with that problem if your business is a cash business
Detection risk is a risk the level of which is entirely in the auditor’s control
The more extensive the audit tests, the lower is the detection risk. The less extensive, the greater the detection risk that the auditor will fail to identify a weakness that, left unchecked, could well lead to major misstatement
Is that OK for you?
Dear Mike,
How can we assess in a scenario that it is an “Inherent Risk” and “Detection Risk” during the exam ?
Inherent risk is a disease suffered by the client
Detection risk is something that the auditor faces and is a result of the impact of the product of inherent risk and control risk when measured against the level of audit risk that the auditor is prepared to accept
I’m not sure how I could explain it better – maybe looking through some past exam answers to see how the issue has bees addressed there
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