Detection risk
In one sentenceThe likelihood that the auditor's procedures will not detect a material error that exists in the statements; it is the only part of audit risk the auditor controls.
Simply put
Audit risk has three parts: inherent, control and detection. The auditor assesses the first two, then adjusts detection risk by increasing or reducing testing.
The higher the first two risks, the lower detection risk must be, meaning more testing and larger samples.
Worked example
An auditor accepts an overall audit risk of 5% for the inventory of a medicine warehouse, and assessed inherent risk at 50% and control risk at 50% (figures for illustration).
Acceptable audit risk5%
Inherent risk × control risk50% × 50% = 25%
Allowable detection risk5% ÷ 25% = 20%
Highest detection risk that can be accepted20%
Formula: Detection risk = audit risk ÷ (inherent risk × control risk)
Don't confuse it with
Control riskControl risk comes from the business, and detection risk comes from the auditor's work.