Audit risk

Audit risk

Audit risk (also referred to as residual risk) refers to acceptable audit risk, i.e. it indicates the auditor's willingness to accept that the financial statements may be materially misstated after the audit is completed and an unqualified (clean) opinion was issued. If the auditor decides to lower audit risk, it means that he wants to be more certain that the financial statements are not materially misstated.

AR = IR*CR*DR

where... IR is inherent risk, CR is control risk and DR detection risk is the conditional probability that the auditor does not detect a material misstatement in the F/S, given that one exists.

DR is split between two components; SR (Sampling Risk) and NSR (Non-Sampling Risk)

  • SR is the risk that the sample selected by the auditor does not properly reflect the population of the data being sampled. The conclusion drawn from such a sample will therefore not be applicable to the entire population.
  • NSR is the detection risk other than SR that the auditor will not detect a material misstatement. This could be due to a variety of reasons eg. human error.


Inherent risk

Main article: Inherent risk

Inherent risk can also be considered as Significant risks. Unlevered beta requires the ratio between the equity value and the value of the firm measured in market value terms. When a company has no debt, i.e. is unlevered, its asset beta is obviously equal to its equity beta.

References

  • Srivastava R.P. & Shafer G.R. (1992) " Belief function Formula for audit risk " Review: Accounting Review, Vol. 67 n° 2, pp. 249–283, for evidence theory applied on audit risk.
  • Lesage (1999)" Evaluation du risque d'audit : proposition d'un modele linguistique " Review: Comptabilite, Controle, Audit, Tome 5, Vol. 2, September 1999, pp. 107–126, for fuzzy audit risk.
  • Fendri-Kharrat et al. (2005)"Logique floue appliquee a l'inference du risque inherent en audit financier ", Review: RNTI : Revue des Nouvelles Technologies de l'Information, n° RNTI-E-5, (extraction des connaissances: etats et perspectives), November 2005, pp. 37–49, Cepadues editions, for fuzzy inherent audit risk.

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