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Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of two main components being the risks of material misstatement and detection risk. Risk of material misstatement is made up of two components, inherent risk and control risk.
Inherent risk is the susceptibiliy of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material either individually or when with other misstatements, before consideration of any related controls.
Control risk is the risk that a misstatement which could occur in an assertion about a class of transaction, account balance or disclosure and which could be material either individually or when aggregated.
Detection risk is the risk that procedures performed by the auditor to reduce audit risk to an acceptable low level will not detect a misstatement which exist and which could be material , either individually or when aggregated. Detection risk is affected by sampling and non sampling risk.
Business risk approach involves the auditor looking at the business as a whole and carrying out an evaluation of the risks to which it may be exposed.The auditor identifies the business risk which may have an impact on the financial statement of the client company. The business risk approach is sometimes called top down approach to an audit. the approach starts at the top with the business which generates the financial transactions and ends at the bottom with the financial statements which record the outcome of the business transactions. It is a high level approach to the audit.
Audit risk is defined as ‘the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk’. Hence, audit risk is made up of two components – risks of material misstatement and detection risk.
Business risk is defined as ‘the risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies, or from the setting of inappropriate objectives and strategies’.
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Business Risk - DefinitionBusiness risks are the factors that could prevent or hinder the achievement of organizational goals and objectives.Difference between Audit Risk and Business RiskBusiness risks facing an organization can be wide-ranging and diverse. The ultimate business risk any organization faces is the risk that it seizes to be a going concern. Business risks therefore comprise any factors that may contribute towards business failure.Examples of business risks include: Loss of customers Increase in production costs Cash flow problems Decline in product demand Litigations and claims Technological obsolescence Increase in market competition Decrease in profitability Political and economic instability Over trading Inadequate financing High financial risk Risk of fraud and theftAudit risk is the risk that the auditor expresses an inappropriate audit opinion on the financial statements. Audit risk therefore includes any factors that may cause a material misstatement or omission in the financial statements.Whereas business risks relate to the organization and its stakeholders, audit risk relates specifically to an auditor. Although audit risks and business risks are dissimilar in nature, it is often the case that identification of significant business risks lead to the detection of audit risks.
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Audit Risk: Risk involved in audit of the possibility of not finding a material discrepancy in the books of the company.
Business Risk: Risk of not getting anticipated profits from business.
Audit Risk is the possibility that an Auditor gives a wrong opinion on Financial Statements of a Company that they give true and fair view at a particular date where in fact they don’t and vice versa. Audit risk is influenced by poor audit planning, poor audit methodology, inadequate sampling techniques and lack of professional skepticism approach.
Business Risk is the possibility that a company will have lower than anticipated profits, or that it will experience a loss rather than a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, overall economic climate and government regulations.
Difference between the two risks are clear from the above description. Audit risk is mainly concerned with external auditors and third parties relying on the opinion of Auditors, whereas Business risk is mainly concerned with business management.
Business risks facing an organization can be wide-ranging and diverse. The ultimate business risk any organization faces is the risk that it seizes to be a going concern. Business risks therefore comprise any factors that may contribute towards business failure.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion on the financial statements. Audit risk therefore includes any factors that may cause a material misstatement or omission in the financial statements. Whereas business risks relate to the organization and its stakeholders, audit risk relates specifically to an auditor. Although audit risks and business risks are dissimilar in nature, it is often the case that identification of significant business risks lead to the detection of audit risks .
