Chapter 5, Problem 1RQ

To determine

Explain the relationship between audit risk and detection risk.

Explanation of Solution

Risk:

It is uncertainty about the future events of the company. The adverse chances of choosing an alternate over another is known as risk.

Audit risk:

The purpose of the audit is to provide an independent and professional opinion on the fairness and accuracy of the financial statement of the company. The auditor of the company is engaged in the analysing of the financial statement to perform the audit process. If the auditor finds any misstatement then he highlights the issue to the management of the company.

Audit risk arises when the auditor is not able to find the misstated information in the financial statement of the company. When the financial statement possesses the material misstatement even after the auditing, then it is regarded as an audit risk

Detection risk:

When the auditor is not able to find the misstatement in the financial statement of the company then it is known as detection risk. When the auditor is not able to detect the misstatement due to error or risk and it will result in the incorrect opinion of the auditor then it is known as detection risk. The reason for detection risk is poor audit technique, lack of business understanding, lack of competence.

Explain the relationship between audit risk and detection risk:

Detection risk is a model of audit risk. Audit risk may arise due to the detection risk. The higher detection risk, higher the audit risk. Detection risk results in the misstatement of the financial statement when the auditor is not able to find the misstatement.

Thus, audit risk rises with the increase in the detection risk.