Detection risk

Detection risk is the risk that an auditor’s procedures will fail to detect a material misstatement in the financial statements. In other words, even if there are errors or fraud, the auditor might not find them due to limitations in the audit process.

Key Points about Detection Risk:

  • Auditor-Controlled: Unlike inherent and control risks, detection risk is influenced by the auditor’s actions—such as the quality of audit procedures and the level of professional skepticism.
  • Inverse Relationship: The higher the inherent and control risks, the lower the detection risk should be (i.e., the auditor must perform more rigorous testing).

Example:

If a company has complex transactions (high inherent risk) and weak internal controls (high control risk), the auditor must reduce detection risk by performing more detailed and extensive audit procedures.

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