Detection risk

Detection Risk

The risk that auditors’ procedures won’t detect material misstatements that exist in the financial statements, despite conducting the audit in accordance with professional standards.

For example, if an auditor relies on sampling to test inventory existence but selects a sample size too small to represent the full population accurately, detection risk increases. Similarly, performing analytical procedures without adequate investigation of significant fluctuations may miss fraudulent revenue manipulation.

Unlike inherent and control risks (which are client characteristics), detection risk is directly influenced by auditor decisions. It’s managed by designing appropriate audit procedures based on assessed client risks. When inherent and control risks are high, auditors reduce detection risk by performing more extensive, effective procedures. This might include increasing sample sizes, conducting more rigorous analytical procedures, or employing specialists. Detection risk can never be eliminated completely due to audit limitations like sampling, the persuasive rather than conclusive nature of audit evidence, and the inherent limitations of audit procedures in detecting sophisticated fraud schemes.