C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined. 18) Which of the following is a correct relationship? A) Acceptable audit risk and planned detection risk have an inverse relationship.
However, because of the nature of audit procedures, some detection risk will always exist. For example, auditors often sample a certain type of company transaction because examining every transaction is impractical. Increasing the sample size can reduce detection risk, but some risk will always remain.
What is 'Detection Risk'. Detection risk is the chance that an auditor will fail to find material misstatements that exist in an entity's financial statements.
D) control risk is determined by company management since they are responsible for internal control. C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined.
It’s important for auditors to assess both control and inherent risk first, then assign detection risk in order to bring the total audit risk to an acceptable level. However, it’s unlikely that an auditor can eliminate detection risk entirely, simply because most auditors will never be able to examine every single transaction that makes up a financial statement. Instead, auditors should aim to keep detection risk at an acceptable level.
Instead, auditors should aim to keep detection risk at an acceptable level. These are the three main components of detection risk. Applying an audit procedure incorrectly. For example, when an auditor applies the wrong acceptable ratio when using ratios to evaluate the face value accuracy of an account balance. Incorrect audit testing method.
There are a number of audit procedures that auditors use to minimize detection risk, including classification testing, completeness testing, valuation testing, and occurrence testing.
If the auditors know the company being audited has poor internal control processes , this risk will be assessed higher. Both inherent risk and control risk increase the level of audit procedures required in order to reduce the detection risk to an acceptable level.
There are three types of audit risk: detection risk, inherent risk, and control risk. Auditors must implement correct audit procedures to limit detection risk. A certain amount of detection risk will always exist, but the auditor's goal is to lower the detection risk sufficiently for overall audit risk to maintain an acceptable level.
Occurrence testing is used to determine whether recorded transactions have actually occurred. This test could involve examining specific invoices listed on the sales ledger and tracing them back to the original customer order and shipping documentation.
Increasing the sample size can reduce detection risk, but some risk will always remain. Detection risk is one of the three elements that comprise audit risk, the other two being inherent risk, and control risk.