Audit risk has two components: the risk of material misstatement (inherent risk and control risk) and detection risk. The auditor assesses the risk of material misstatement and designs procedures to reduce detection risk to an acceptable level.
The more accurate the risk assessment, the more efficient the audit: more work is directed to high-risk areas and less to low-risk ones.
Source: BDS 200, BDS 315
Related terms
MaterialityA misstatement being large enough, individually or together with others, to influence the economic decisions of users of the financial statements.Tests of controlsProcedures performed to evaluate whether an entity's internal controls operate effectively in preventing, or detecting and correcting, material misstatements.Substantive proceduresTests of details and analytical procedures performed on account balances, transactions and disclosures to detect material misstatements in the financial statements.Reasonable assuranceA high but not absolute level of assurance; the level of assurance the auditor provides on the financial statements in an independent audit.Adverse opinionThe opinion in which the auditor states that the financial statements are not presented fairly, where misstatements are both material and pervasive.Agreed-upon proceduresAn engagement in which the practitioner performs procedures agreed with the entity and, where relevant, a third party, and reports only the findings without providing assurance.
Last updated: October 22, 2026 · This definition is for general information only.