Definition
Detection risk is the risk that the auditor's procedures will not find a misstatement that exists and could be material, individually or with others. It has two sources: sampling risk, which comes from testing less than the full population, and non-sampling risk, such as using the wrong procedure or misreading evidence.
Why it matters in an audit or review
The auditor controls detection risk through the nature, timing and extent of procedures. It moves opposite to the assessed risk of material misstatement. When risk is high, the team accepts little detection risk and chooses more persuasive procedures, tests closer to year end, and tests more items. When risk is low, the team can accept more.
Detection risk can be reduced but not removed, because auditors test samples and use judgment.
Example
For accounts receivable, the risk of material misstatement is assessed as high because of past cutoff problems. The team lowers detection risk by sending confirmations on a larger sample instead of relying only on subsequent receipts, and by testing cutoff on shipments for several days either side of year end (illustrative: five days instead of two).
Common mistakes
Cutting procedures to hit the budget on an area whose risk assessment went up during fieldwork. If the assessment changes, the response has to change with it.
Sources
- AICPA, AU-C Section 200, Overall Objectives of the Independent Auditor (definitions of audit risk and detection risk)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks
- AICPA, AU-C Section 530, Audit Sampling (sampling risk)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error