Detection Risk
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Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Detection risk is one of three components of the audit risk model, and a heavily tested concept on the AUD section of the CPA exam.
What is detection risk?
Detection risk is the risk that an auditor's procedures will fail to detect a material misstatement in the financial statements. Unlike inherent risk and control risk — which are entity-specific and outside the auditor's control — detection risk is influenced by the audit procedures themselves, which means the auditor can directly manage it.
How does detection risk fit into the audit risk model?
Since inherent risk and control risk are largely outside the auditor's control, detection risk is the lever the auditor adjusts to keep overall audit risk at an acceptable level.
What affects detection risk?
- Level of audit work — more comprehensive testing lowers detection risk
- Auditor's skill — a more proficient auditor is less likely to miss a misstatement
Example: You're auditing a large corporation with a complex network of overseas subsidiaries. If you perform only minimal testing on inter-company transactions due to time constraints, detection risk for those transactions is high — material misstatements could exist that your limited procedures simply won't catch.
Detection risk is the one component of audit risk the auditor directly controls. When inherent or control risk is high, the auditor responds by lowering detection risk — doing more testing, or using more experienced staff — to keep overall audit risk acceptable.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 90 on AUD. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.
