Detection risk refers to the probability that an auditor will fail to detect a material misstatement in a client’s financial statements.
Factors Impacting Detection Risk:
- Inherent risk influences due to account balances/disclosures susceptible to misstatements
- Control risk arises if internal controls do not sufficiently prevent/detect errors
- Smaller sample sizes in testing increase risk versus 100% examination
Example:
By focusing audit procedures on new inventory processes lacking effective controls amid staff turnover, the auditors appropriately addressed heightened detection risk of material misstatement.
Key Considerations:
Detection risk influences the nature, timing and extent of planned audit procedures necessary to restrict undetected misstatement risk to an acceptably low level. Evaluating it requires professional judgment regarding risk assessments.