During audit of ABC Ltd., the audit team discussed the concept of audit risk. The engagement partner explained that audit risk is a function of the…
CA Intermediate · Auditing and Ethics · MTP · January 2026
During audit of ABC Ltd., the audit team discussed the concept of audit risk. The engagement partner explained that audit risk is a function of the risks of material misstatement and detection risk. He further stated that the assessment of these risks depends on the audit procedures performed to obtain necessary information and evidence gathered throughout the audit. One of the junior auditors asked whether such risk assessment could be determined through precise measurement. The partner clarified that risk assessment is a matter of professional judgment, not an exact calculation and that such judgment comes from the auditor's training, knowledge, and experience which help in forming reasonable conclusions. (i) Discuss the concept of Audit risk. Explain what is included and what is not included in audit risk and state the basis on which the assessment of audit risk is made. (ii) The assessment of audit risks is considered a matter of professional judgment. Explain how an auditor's training and experience support this judgment.
Suggested Answer and Working Notes:
(i) Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk. Audit risk is a technical term related to the process of auditing; it does not refer to the auditor's business risks such as loss from litigation, adverse publicity, or other events arising in connection with the audit of financial statements. For purposes of the SAs, audit risk does not include the risk that the auditor might express an opinion that the financial statements are materially misstated when they are not. This risk is ordinarily insignificant. The assessment of risks is based on audit procedures to obtain information necessary for that purpose and evidence obtained throughout the audit. (ii) The assessment of risks is a matter of professional judgment, rather than a matter capable of precise measurement. The distinguishing feature of the professional judgment expected of an auditor is that it is exercised by an auditor whose training, knowledge and experience have assisted in developing the necessary competencies to achieve reasonable judgments.
Topics: Risk Assessment and Internal Control
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