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Dear Sir
Kindly make me understand with the help of example statement that
” There is inverse relationship between Detection Risk and Combined Risk of Inherent Risk & Control Risk.
with regards
Deep
Remember detection risk is the risk that procedures performed by the auditor will not detect misstatements in financial statements which could be material individually or when aggregated together.
When control and inherent risk is high errors,fraud and so on can be easily identified. One of the examples I may think of is poor internal controls including control environment, control processes, risk assessment procedures, accounting system. Therefore such misstatements are more transparent which can be detected with minimum, less complex testing compared to when the internal system is operating effectively.
If on the other hand the internal control system is so strong it’s almost impossible to commit fraud, errors can be prevented then control risk and probably inherent risk is low. If there is any misstatement regardless of the strength of the system, it may be impossible to find exactly where they are embedded within the financial statements.
That’s what I think.
If inherentr risk is high there is a high chance that an error will occur.
If control risj is also high then there is a high risk that that error is not detected by the client’s system.
Therefore there is a high risk that the error will appear in the draft FS.
Auditors have to do lots of work in such a situation. By doing more work they lower the detection risk (ie the risk that they miss an error).
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