Component |
Description |
Inherent Risk |
The risk of material misstatement in the financial statements due to errors or fraud, assuming no related controls. |
Control Risk |
The risk that a material misstatement will not be prevented or detected on a timely basis by the company’s internal controls. |
Detection Risk |
The risk that the auditors’ procedures will not detect a material misstatement. |
Audit Risk |
The overall risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. |
Formula |
Audit Risk = Inherent Risk × Control Risk × Detection Risk |
Purpose |
Used to assess and manage the risk of issuing an incorrect audit opinion. |