CA Mahavir is conducting a training session for newly joined audit trainees. He explains the concept of audit risk and its three components. He…

Professional skepticism is necessary to the critical assessment of audit evidence. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of the circumstances, for example in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud, is the sole supporting evidence for a material financial statement amount. There are three components of audit risk viz. inherent risk, control risk and detection risk. The auditor can only influence detection risk. Inherent risk and control risk belong to the entity and are influenced by the entity. Examples of detection risk are as under: - Sizeable work-in-progress inventories are expected in financial statements of a company. However, auditor of the company does not devote time to attending inventory count. Instead, he chooses to rely upon alternative audit procedures.The auditor of a company has audited revenue of a company by taking a sample. However, there is a risk that sample of revenue is not representative of overall revenue. Therefore, the auditor must reduce detection risk in order to keep audit risk at low level. Detection risk may be reduced by increasing area of checking, testing larger samples and by including competent and experienced person in the engagement team.