Audit Risk

(AR)Audit Risk, is the acceptable audit risk, that the auditor may, unknowingly, fail to modify appropriately the opinion on financial statements that are materially misstated. Simply stated, its the risk an auditor is willing to take that he might issue a clean report on not so clean financials.


If the auditor decides to lower audit risk, he wants to be more certain that the financial statements are not materially misstated. The two important equations to understand the level of audit risk and determine the audit work are-( terms explained below)

1.AR=RMM*DR

2.RMM=IR*CR

(RMM) Risk of Material Misstatement, the auditor's assessment of risk of misstatement. This risk exist independent of audit and auditor cannot generally It can be understood as,

(IR)Inherent Risk, is the risk of a material misstatement occurring in an assertion assuming no related internal controls.

(CR)Control Risk, is the risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control.

(DR) Detection Risk, is the  risk that the auditor will not detect a misstatement that exists in a relevant assertion. i.e. risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist.

Audit Procedures
Audit Techniques