Audit risk refers to the risk that auditors fail to qualify their audit report when the financial statements are materially misleading, i.e., do not provide a true and fair view. Audit risk is comprised of three components: inherent risk, control risk, and detection risk.
Control risk, also known as internal control risk, refers to the possibility that misstatements in a company's financial statements will not be prevented or detected on a timely basis by the internal control system. It is an essential component of audit risk and requires an in-depth assessment during the auditing process.
The risk that an auditor fails to detect any material misstatements in the financial statements. Unlike control risk and inherent risk, the level of detection risk can be controlled by the auditor through varying the nature, timing, and extent of audit procedures.
Internal control risk refers to the likelihood that internal controls within an organization will fail to prevent or detect financial reporting inaccuracies, leading to potential financial misstatements. It is a critical component auditors assess to ensure the accuracy and reliability of financial statements.
