Audit risk is the risk that an auditor will not detect errors or fraud while examining the financial statements of a client. Auditors can increase the number of audit procedures in order to reduce the level of audit risk. Reducing audit risk to a modest level is a key part of the audit function, since the users of financial statements are relying upon the assurances of auditors when they read the financial statements of an organization.
The three types of audit risk are as follows:
- Control risk. This is the risk that potential material misstatements would not be detected or prevented by a client's control systems.
- Detection risk. This is the risk that the audit procedures used are not capable of detecting a material misstatement.
- Inherent risk. This is the risk that a client's financial statements are susceptible to material misstatements.