Detection risk is the possibility that an auditor will not locate a material misstatement in a client’s financial statements via audit procedures. This is particularly likely when there are several misstatements that are individually immaterial, but which are material when aggregated.
Detection Risk is the chance that an auditor will not find material misstatements relating to an assertion in an entity’s financial statements through substantive tests and analysis. Detection risk is the risk that the auditor will conclude that no material errors are present when in fact there are. Detection risk is one of the three elements that comprise audit risk, the other two being inherent risk and control risk.
Detection Risk and quality of audit have an inverse relationship: if detection risk is high, lower the quality of audit and if detection risk is low, generally higher the quality of audit
The outcome is that an auditor would conclude that there is no material misstatement of the financial statements when such an error actually exists, which would then lead to the issuance of an erroneously favorable audit opinion.
The auditor is responsible for managing detection risk. The level of detection risk can be reduced by conducting additional substantive tests, as well as by assigning the most experienced staff to an audit. There will always be some amount of detection risk in an audit, since audit procedures do not comprehensively examine every business transaction – instead, they only review a sampling of these transactions.
Detection is one of the three risk elements that comprise audit risk – which is the risk that an inappropriate audit opinion will be issued. The other two elements are inherent risk and control risk.