Understanding Inherent, Control & Detection Risk
Breaking Down the Three Risks
Each component of the audit risk model represents a different source of uncertainty. Understanding their relationships is essential for effective audit planning.
- Complex transactions increase inherent risk.
- Weak internal controls increase control risk.
- Additional audit evidence reduces detection risk.
Tip
If inherent and control risk are high, auditors must reduce detection risk by performing more effective audit procedures.
Summary
The three risks work together to determine the overall audit risk.