Control risk

Control risk is the risk that a material misstatement in financial statements (or a failure in a process) will not be prevented, detected, or corrected promptly by the organisation’s internal controls.

Key Aspects of Control Risk:

  • Dependent on Internal Controls: It reflects the effectiveness (or ineffectiveness) of an organisation’s internal control systems.
  • Assessed by Auditors: In auditing, control risk is evaluated to determine how much reliance can be placed on internal controls.
  • Not Eliminated, Only Reduced: Even strong controls can’t eliminate all risk, but they can significantly reduce it.

Example:

If a company has weak segregation of duties in its accounting department, there's a higher control risk that errors or fraud could go undetected.

Relationship to Other Risks:

Control risk is one component of audit risk, which is typically broken down as:

Audit Risk = Inherent Risk * Control Risk * Detection Risk

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