Page 48 - CA Inter Audit PARAM

CA Ravi Taori
o The SAs do not ordinarily refer to inherent risk and control risk separately, but
rather to a combined assessment of the “risks of material misstatement”.
However, the auditor may make separate or combined assessments of inherent
and control risk depending on preferred audit techniques or methodologies and
practical considerations.

• Detection Risk:
o It is the risk that the procedures performed by the auditor to reduce audit risk to
an acceptably low level will not detect a misstatement that exists and that could
be material, either individually or when aggregated with other misstatements.
o Detection risk relates to the nature, timing, and extent of the auditor’s
procedures that are determined by the auditor to reduce audit risk to an
acceptably low level. It is therefore a function of the effectiveness of an audit
procedure and of its application by the auditor.

Inter-relationship of Components of Audit Risk:
• Audit risk is a function of the risks of material misstatement and detection risk. The
inherent and control risks are functions of the entity’s business and its environment and
the nature of the account balances or classes of transactions, regardless of whether an
audit is conducted.
• Even though inherent and control risks cannot be controlled by the auditor, the auditor
can assess them and design his substantive procedures to produce on acceptable level of
detection risk, thereby reducing audit risk to an acceptably low level.
• For a given level of audit risk, the acceptable level of detection risk bears an inverse
relationship to the assessed risks of material misstatement at the assertion level.
o For example,
The greater the risks of material misstatement the auditor believes exists, the
less the detection risk that can be accepted and, accordingly, the more
persuasive the audit evidence required by the auditor.
Author’s Note

This is a master answer. Students are required to write the appropriate part as per the requirements of the
question

QNO-- Detection Risk & Its Components New Course – (M24R)
315.01.20 Bhaskar CNO – SA315-P1.020

Satranga Foods Private Limited is engaged in manufacturing of pickles. The auditors of the company have
planned audit procedures in respect of recognition of revenues of the company. Despite that, there is a

possibility that misstatements in revenue recognition are not identified by planned audit procedures.
Identify and explain that particular risk in detail.
Answer There is a possibility that planned audit procedures may not achieve desired result and fail to detect
misstatements in revenue recognition. Such a risk is referred to as “detection risk”.

SA 200 defines detection risk as the risk that the procedures performed by the auditor to reduce audit risk to
an acceptably low level will not detect a misstatement that exists and that could be material, either individually
or when aggregated with other misstatements.

For example, auditor of a company uses certain audit procedures for the purpose of obtaining audit evidence
and reducing audit risk, but still there will remain a risk that audit procedures used by the auditor may not be
able to detect a misstatement which by nature is material, then that risk is known as detection Risk.

Detection risk comprises sampling and non-sampling risk.
a) Sampling risk is the risk that the auditor’s conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure. It simply means that
the sample was not representative of the population from which it was chosen.

b) Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for any reason not
related to sampling risk. Like an auditor may reach an erroneous conclusion due to application to some
inappropriate audit procedure.
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