Inherent, Control & Detection risk

[ibrishah]

Hi there
I am much confuse about the above three risks of Audit i.e. Inherent risk, Control risk, Detection risk. What are they and what shall an auditor do if on of them is high and if two of them are high.

Waiting for ur prompt reply thanx

Ibri

[maani]

Hi,
Inherent risk means that a risk of material misstatement exists because of the inherent nature of the account balance or because of the inherent nature of the business.Example in construction industry inherent risk is high because the revenues and costs stated in the financial statements are purely estimates...these are not accurate figures...and the estimates can be inaccurate to a material extent.
This type of risk can be reduced by increasing the extent of test of details.
Control risk means the risk that the internal controls applied by the entity are not operating effectively. This type of risk can be reduced by increasing the extent of Tests of Controls.
Detection risk is the risk that the auditor may not able to sort out a material misstatement in the financial statement when in fact it does exits.Detection risk can be reduced by proper planning, supervision and review and by increasing the extent of test of details.

Ace

[ibrishah]

Thanx Maani it was very enough for my understanding its simple and at time explainative can i take help in other areas of Audit.

Ibri

[CBPian]

In some audit texts, following formula is given to understand the relationships between these various risks

AR = IR X CR X DR

So you can see that there is inverse relationships between IR, CR and DR.
To decrease DR; one would modify the level of testing based on assessment of IR and CR.

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