Detection Risk and Audit Risk: Managing Material Misstatements

This report examines audit risk, focusing on the auditor's challenge in detecting errors within a company's financial statements. It emphasizes the significance of substantive procedures in addressing and mitigating audit risk. The report highlights inherent risks associated with the company and its stakeholders, advocating for the adoption of the audit risk model to evaluate relationships between different risks. The model incorporates control risk, detection risk, and inherent risk, which are crucial for assessing material misstatement risk. The auditor's role in considering detection risk to minimize overall audit risk is underscored, along with strategies such as nurturing relationships within the company and monitoring key processes to identify and manage potential fraud. The report concludes by suggesting compliance with tax reporting regulations to resolve identified issues.

Running Head: Audit
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Auditing & Assurance
2/5/2020

Audit
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To: Mr. Cheatem
From: XYZ
Date: 5 February 2020
While examining the financial statement of the company there are many frauds or error which is
not easy to examine and that risk is considered as audit risk. But the level of audit risk can be
addressed and issues can be resolved through the substantive procedures. Audit risk is considered
as the problem as it is the issue that was faced by the auditor when they fail to detect the
mistakes in the financial statement of the company (Contessotto and Moroney, 2014). There are
many inherent risks that are involved in the company so it is a risk factor that relates to the firm
Dewey, Cheatem and Howe and its stakeholders.
The audit risk model can be adopted as it helps in evaluating the relationship between the
different risks which helps in managing the risk of the company. There are three mechanisms of
the risk which are control risk, detection risk and inherent risk. The control risk and inherent risk
are made up of material misstatement risk so the audit risk model can also be stated as DR* Risk
of material misstatement = Audit Risk (Ellul and Yerramilli, 2013). Yes the DR has to be
concerned by the auditor to decrease the audit risk and to assess the material misstatement in the
company’s financial report.
There are several actions through which audit risk can be minimized such as by nurture and
managing the relationship of all the level of the company and by monitoring the key processes
and controls helps in evaluating the frauds and errors in the company (BOTEZ, 2015). The issue
can be resolved by adopting the line of complying and fulfilling tax reporting.

Audit
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References
BOTEZ, D., 2015. Study Regarding the Need to Develop an Audit Risk Model. Audit
financiar, 13(125).
Contessotto, C. and Moroney, R., 2014. The association between audit committee effectiveness
and audit risk. Accounting & Finance, 54(2), pp.393-418.
Ellul, A. and Yerramilli, V., 2013. Stronger risk controls, lower risk: Evidence from US bank
holding companies. The Journal of Finance, 68(5), pp.1757-1803.