## Detection Risk
### Definition
Detection Risk is the risk that the audit procedures performed will not detect a material misstatement that exists in an assertion.
Unlike IR and CR (entity risks), Detection Risk is the only component of Audit Risk that the auditor can control.
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### How to Reduce Detection Risk
The auditor can lower Detection Risk by:
1. Increasing the area of checking (broader coverage)
2. Testing larger samples (more representative)
3. Including competent and experienced personnel in the audit team
4. Changing the nature and timing of audit procedures
> Key principle: Higher ROMM → Accept lower Detection Risk → Increase extent/nature of audit work
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### Two Components of Detection Risk
#### 1. Sampling Risk
- Risk that the auditor's conclusion, based on a sample, may be different from the conclusion if the entire population were tested
- Arises because the sample is not representative of the whole population
- Can be reduced by: selecting larger, statistically valid samples
#### 2. Non-Sampling Risk
- Risk that the auditor reaches an erroneous conclusion for any reason other than sampling risk
- Causes:
- Applying an inappropriate audit procedure for the assertion
- Misinterpreting audit evidence
- Failing to recognize a misstatement even when evidence is obtained
> Example of Non-Sampling Risk: Auditor skips attending the physical inventory count (required by SA 501) and instead relies only on management's inventory listing. The procedure itself is inappropriate — this is non-sampling risk.
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### Detection Risk in Context of the Audit Risk Formula
$$\text{Audit Risk} = \text{ROMM} \times \text{DR}$$
| ROMM Level | Required DR | Audit Response |
|---|---|---|
| High | Must be Low | More work, larger samples, senior staff |
| Low | Can be relatively Higher | Less extensive procedures |
> Setting Detection Risk low means the auditor designs procedures to have a very high probability of detecting any misstatement that exists.
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### Summary Comparison
| Inherent Risk | Control Risk | Detection Risk | |
|---|---|---|---|
| Who controls it? | Entity/Nature | Entity/IC | Auditor |
| When does it exist? | Before the audit | Before the audit | During the audit |
| How to reduce? | Cannot be reduced by audit | Improve IC (client's job) | More/better audit procedures |