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Definition of "Audit Risk" |
Audit risk (also referred to as residual risk) refers to the risk that an auditor may issue unqualified report due to the auditor's failure to detect material misstatement either due to error or fraud. This risk is composed of inherent risk (IR), control risk (CR) and detection risk (DR), and can be calculated as:AR = IR × CR × DR where... IR is inherent risk, CR is control risk and DR is detection risk. IR refers to the risk involved in the nature of business or transaction. Example, transactions involving exchange of cash may have higher IR than transactions involving settlement by cheques. |
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