Audit Risk

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 the risk of material misstatement (RMM) and the auditor's response to that risk.

The risk of material misstatement is the risk that the financial statements are materially misstated before the audit is completed. The auditor's response to the risk of material misstatement includes planning and performing the audit, including obtaining sufficient appropriate audit evidence to support the auditor's opinion.

Audit risk is a key concept in auditing because it is the auditor's responsibility to design and perform the audit to reduce audit risk to an acceptably low level. The auditor's assessment of audit risk is based on the auditor's understanding of the entity and its environment, including the entity's internal control.

The auditor's assessment of audit risk is also based on the auditor's experience with the entity and the auditor's knowledge of the industry in which the entity operates. The auditor's assessment of audit risk is documented in the audit plan.

The auditor's response to the risk of material misstatement includes planning and performing the audit, including obtaining sufficient appropriate audit evidence to support the auditor's opinion. The auditor's response to the risk of material misstatement is also documented in the audit plan.

Audit risk is a key concept in auditing because it is the auditor's responsibility to design and perform the audit to reduce audit risk to an acceptably low level. The auditor's assessment of audit risk and the auditor's response to the risk of material misstatement are critical components of the audit process.