Detection Risk

Written by Fmi.Online Friday January 6, 2023
Detection risk is the possibility that an auditor fails to identify material misstatements in the financial statements of a firm and determines that there are no omissions or material errors before the statements are issued even though there are mistakes present.

Explanation :

One of the most common mistakes that auditors make is to believe that a misstatement in a financial statement is trivial. This is true when examining the misstatements on an individual basis, but when accumulated, they may alter the result of the audit. Actually, the detection risk increases the audit risk at an above acceptable level, since the other two components of audit risk, inherent risk, and control risk, increase as a result of the business risk.

In a nutshell :

  • Detection risk occurs when an auditor fails to identify a material misstatement in a company's financial statements.
  • There are three types of audit risk: detection risk, inherent risk, and control risk.
  • Auditors must implement correct audit procedures to limit detection risk.
  • A certain amount of detection risk will always exist, but the auditor's goal is to lower the detection risk sufficiently for overall audit risk to maintain an acceptable level.
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