Control risk

Control risk is the probability that financial statements are materially misstated, due to failures in the system of controls used by a  business. When there are significant control failures, a business is more likely to experience undocumented asset losses, which mean that its financial statements may reveal a profit when there is actually a loss.

The managers of a business are responsible for designing, implementing, and maintaining a system of controls that is adequate for preventing the loss of assets. It is not easy to maintain a solid system of controls, since the system must be periodically altered to fit ongoing changes in business processes, as well as to deal with entirely new business transactions. Also, management may knowingly avoid implementing certain controls, on the grounds that they are too expensive to maintain or that they interfere with the smooth flow of transactions that impact customers.