Among the three types of audit risk, control risk is in the middle as the control is usually put in place to reduce the chance of error or fraud that inherits from the business and its environment.In this case, once auditors have assessed that the inherent risk is high, the level of risk of material misstatement can only be reduced if the control risk is low. The GAAS audit risk model requires auditors to use their judgment in assessing risks.

1. We will discuss this in detail below. For example, auditors should have proper risks assessment at the planning stages.These risks assessment required auditors to understand not only the nature of the business but also internal control activities that link to financial reporting.Mostly, COSO frameworks are the popular frameworks that use by most of the international audit firms to documents and assess internal controls.Once the internal over financial statements and risks are properly assessed, the audit programs are properly tailored, then Control Risks are minimized.Well, detection risk is the risk that auditor fails to detect the material misstatement in the financial statements and then issued an incorrect opinion to the audited financial statements.The common cause of detection risk is improper audit planning, poor engagement management, wrong audit methodology, low competency and lack of understanding of audit clients.Detection risk is occurred because of the auditor part rather than the client part.As mentioned, detection risk could be the result of poor audit planning.

Example: transactions involving high-value cash amount carry more inherent riskthan the transaction involving high-value cheques. Transactions requiring the high level of judgment which may lead to risk of not being identified.

2. There are many types of audits including financial audit, operational audit, statutory audit, compliance audit and so on.

All of these three risks are discussed below:Audit Risks = Inherent risks * Control risks * Detection risksLet me clarify about the formula here.

This is the risk that potential material misstatements would not be detected or prevented by a client's control systems. However, if the internal controls are weak, the auditors will have to perform more substantive tests so that the overall audit risk can be minimized.Detection risk is the risk that auditors fail to detect the material misstatement that exists in the financial statements.

Before we say whether or not audit risk is calculable, let see the model first.Audit Risks = Inherent Risk X Control Risk X Deletion RiskThis formula seems to tell us that the audit risks are quantifiable yet it does not.This formula is just the concept. If certain risks are identified during the cause of audit, the auditor should perform additional assessments to figure out the real size of the risks.The auditor should assess audit risks before accepting the For example, the financial reporting of the merchandising company might be easy to audit than financial reporting in agriculture or oil.The auditor should also assess audit risks at the time they prepare the audit plan.
Just because the model use multiplies here it does not mean that the need to be multiple to get audit risk. For example, the exposure in the complex derivative instrument.This kind of risk could also be affected by the external environment; for example, climate change, political problem, or some other PESTEL effect on the business.Auditors required to assess those kinds of risks and set up audit procedures to address inherent risks properly.Those include sufficient time for the audit team to work on the significant areas or having a member that has a deep understanding of the business as well as accounting transactions of the auditing financial statements.In case auditor being aware that the potential client has high exposure to inherent risks, and auditor also know that the current resources are not capable to handle such client, the audit should not accept the engagement.This procedure could help the auditor to minimize audit risks that come from inherent risks.Control risk or internal control risk is the risk that current internal control could not detect or fail to protect significant error or misstatement in the financial statements.Basically, management is required to set up and assess the effectiveness and efficiency of internal control over financial reporting to make sure that financial statements are free from material misstatements.Why is the weakness of internal control leads bring risk to the auditor?Basically, if the control is weak, there is a high chance that financial statements are materially misstated, and there is subsequently a high chance that auditors could not detect all kinds of those misstatements.That means to control risk could lead to audit risk. Audit risk is the risk that auditors give a clean opinion on financial statements that contain material misstatement.

It is the type of audit risk that occurs due to the auditors fail to detect material misstatements in the financial statements.Inherent risk is the risk that financial statements contain material misstatement before consideration of any related controls.

This is due to the derivative is the type of financial instrument that is generally considered complex in the accounting field.The inherent risk cannot be reduced as it is related to the nature of the business and transaction itself. For example, if audit planning is poor, not all kinds of risks are defined and the audit program that use to detect those risks is to deploy incorrectly. These three types of audit risk include: Inherent risk; Control risk; Detection risk; Inherent and control risk are the risks of material misstatement arising in the financial statements. These types of audit risk are dependent on the business, transactions and internal control system that the client has in place. This is the risk that a client's financial statements are susceptible to material …
Components of Audit Risk include Inherent Risk, Control Risk and Detection Risk.

Normally, this is done by using a control framework like COSO to assess all angles of the business process.At this stage, the auditor might obtain an understanding in detail of the client nature of the business, major internal control over financial reporting, financial reporting system and many more.Auditor will also assess the leadership of the management team as well as the entity’s culture.The above, we have mentioned the audit risks model and by that, you might think of the way to casting audit risk.


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