Audit Risk Concept

Audit Risk Concept

Audit risk is that auditor expresses an inappropriate opinion on financial statement, where financial statements are misstated. It means that auditor could not detect the misstatement in the financial statement and therefore expressed an inappropriate opinion. Audit risk basically related to audit procedures.

Types of Audit Risk

There are two types of audit risk i.e. significant audit risk and insignificant audit risk. Significant risk is auditor express that financial statement is not materially misstated but in fact these are and vise versa.

Element of Audit Risk

Audit risk is basically a function of risk of misstatement and detection risk.

How audit risk is assessed?

Audit risk is assessed by the audit procedures applied throughout the audit and information obtained from those audit procedure.

Measurement of Audit Risk

The measurement of audit risk is not possible; rather it is assessed on the bases of professional judgment. For example one cannot say that there is 20% or 30% audit risk.

Elimination of Audit Risk

Audit risk cannot be eliminated due to inherent limitation of audit.  Inherent limitation arises from the following

a)    limitation of financial reporting

b)    limitation of audit procedures

c)    Deadlines

d)    Audit work is based on sampling

e)    Audit evidence is persuasive rather than conclusive.

Inherent limitation cannot be used as excuse for using less than persuasive audit evidence. Auditor must seek persuasive audit evidence for conclusion.

Lowering Audit Risk

Audit risk can be lowered by the appropriate planning & directing the audit effort to those areas which are more risky. Use more extensive testing for risky areas.