The auditor's goal is to conduct the audit of financial statements in a way that reduces

audit risk to an appropriate level where the Auditors’ assessments and responses are critical to
audit quality. Audit risk is defined as the possibility that the auditor will issue an incorrect audit
opinion when the financial statements are materially incorrect. The risks of material
misstatement and detection risk are proportional to form audit risk (ACCA, 2021). Furthermore,
audit risk has two components: material misstatement risk and detection risk.

The risk of material misstatement is defined as the possibility that the financial
statements will be materially misstated prior to audit. According to AS 2110, Identifying and
Assessing Risks of Material Misstatement, the auditor should evaluate the risks of material
misstatement at two levels: at the financial statement level and at the assertion level
(PCAOB,2010). Risks of material misstatement at the financial statement level are pervasive in
the financial statements as a whole and may affect many assertions. It can be also especially
relevant to the auditor's consideration of the risk of material misstatement due to fraud. Risk of
material misstatement at the assertion level consists of the following components: Inherent
risk, which refers to the susceptibility of an assertion to a misstatement, due to error or fraud, that
could be material, individually or in combination with other misstatements, before consideration
of any related controls. And Control risk, which is the risk that a misstatement due to error or
fraud that could occur in an assertion and that could be material, individually or in combination
with other misstatements, will not be prevented or detected on a timely basis by the company's
internal control. It is also a function of the effectiveness of the design and operation of internal
control.  Inherent risk and control risk are related to the company, its environment, and its
internal control, and the auditor assesses those risks based on evidence he or she obtains.

Detection risk is defined as the risk that the procedures used by the auditor to reduce
audit risk to an acceptable level will fail to detect an existing and potentially material
misstatement, either individually or when aggregated with other misstatements. The nature,
timing, and scope of the substantive procedures performed by the auditor reduce the level of
detection risk. As the appropriate level of detection risk decreases, the auditor should obtain
more evidence from substantive procedures (PCAOB, 2010).

Every audit procedure begins with an audit risk assessment. The following statements
demonstrate the significance of audit risk: The assessment of client-specific risks at the
beginning of the audit process steers the audit in the right direction and reduces the possibility of
over-auditing; The audit risk assessment assists auditors in rendering an accurate opinion on the
company's financial statements; If audit risks are not assessed during the initial phase, the entire
audit procedure is considered non-compliant with GAAP (generally accepted accounting
principles); and Auditors cannot audit each and every transaction of the entity, and audit risk
assessment aids in focusing attention where risk is high, like a risk-based approach to auditing
(Gupta, 2020).

In conclusion, the concept of audit risk is key importance to the audit process as Audit
risks help driving the audit in the right direction and help in setting the risk appetite of the audit
procedure. It also helps auditors in laying down the audit strategy for a particular organization.
Audit risk is inherent in the auditing process because auditors cannot and do not attempt to check
all transactions. Auditors have traditionally used a risk-based approach to minimize the
possibility of providing an incorrect audit opinion, and audits conducted in accordance with ISAs
must follow the risk-based approach, which should also help to ensure that audit work is carried
out efficiently, using the most effective tests based on the audit risk assessment. (ACCA, 2021)

REFERENCES:

ACCA. (2021). Audit Risk. Retrieved from https://www.accaglobal.com/gb/en/student/exam-

support-resources/fundamentals-exams-study-resources/f8/technical-articles/audit-risk.html on
October 20, 2021
ACCA. (2021). Answering Audit Risk Question. Retrieved from
https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-
resources/f8/technical-articles/audit-risk0.html on October 20, 2021
Gupta, N. (2020). Audit Risk. Retrieved from https://www.educba.com/audit-risk/ on October
20, 2021
PCAOB. (2010). AS 1101: Audit Risk. Retrieved from
https://pcaobus.org/oversight/standards/auditing-standards/details/AS1101 on October 20, 2021