What is defined as detection risk in an audit setting?

Detection risk in an audit context specifically refers to the risk that the auditor's procedures will not detect a material misstatement in the financial statements. This risk is inherent in all audits and arises from the possibility that the auditor may not identify significant errors or omissions, despite conducting appropriate audit tests.

Detection risk is influenced by several factors, including the effectiveness of the audit procedures employed and the inherent risk of the audit area being examined. When auditors design their procedures, they assess the likelihood of this risk occurring and adjust their audit strategy accordingly to minimize it.

For instance, if the auditor perceives that there is a high likelihood of material misstatement, they may decide to increase the extent of their testing or the rigour of their procedures to reduce detection risk to an acceptable level. This is distinct from other types of risk encountered in the audit process, such as inherent risk or control risk, which relate more to the auditee's environment and internal controls rather than the auditor's own procedures.