Audit risk

Audit risk 

Risk that auditor gives inappropriate audit opinion on FS that are materially misstated

Can be directly controlled 

3 components of audit risk:

• Inherent risk
• Control risk
• Detection risk

Auditor’s business risk is not the same as audit risk.

Simple definition

Auditor’s business risk is the risk that the audit firm itself suffers loss or negative consequences because of taking on and performing an audit engagement.

In other words: It is the risk that the auditor’s own business is affected – for example:

• Being sued by clients or third parties
• Reputation damage (name spoiled in the market)
• Loss of fees / not being paid
• Regulatory action (fines, penalties, suspension)
• Losing other clients because of bad publicity

Easy examples

1. The auditor gives an unmodified opinion. Later, the company collapses due to fraud.

• Investors sue the auditor → lawsuit = auditor’s business risk.

2. Client is in a high-risk industry (e.g. crypto, gambling, etc.).

• Association with them may hurt the audit firm’s reputation → business risk.

3. Client delays payment of audit fees or cannot pay.

• Audit firm may not recover its costs → business risk.

Difference vs Audit Risk

	Audit Risk	Auditor’s Business Risk
Focus	Risk of wrong audit opinion	Risk to the audit firm’s own business
Main impact	Financial statements users misled	Auditor suffers loss: money, reputation, legal, regulatory
Formula	AR = IR × CR × DR	No standard formula

Short exam-style answer (you can use this)

Auditor’s business risk is the risk that the audit firm will suffer loss or negative consequences as a result of being associated with a client or performing an audit engagement, for example through litigation, loss of reputation, regulatory sanctions or loss of fees.