CA SS is conducting a training session for newly joined audit trainees. She explains the concept of audit risk and its three components. She mentions that while two components of audit risk are beyond the auditor's contr

The audit risk is composed of inherent risk, control risk and detection risk where the auditor can only influence detection risk as the inherent risk and control risk belong to the entity and are influenced by the entity. Detection risk is the risk that the audit procedures performed by internal auditors will fail to detect a material error, fraud, control weakness, or non-compliance that exists within the organization. The examples of detection risks are as under: Procurement Irregularities: An internal auditor reviews only a small sample of procurement transactions and does not verify the same with procurement conditions. Therefore, the internal audit fails to identify mismatch in actual procurement vis a vis stipulated conditions and fraudulent vendor payments. Inventory Misappropriation: The Warehouse staff misappropriates inventory and manipulates stock records. The auditor relies on inventory reports without conducting physical verification, resulting in non-detection of shortages and misappropriations.