Audit Risk

AAA

DEFINITION of 'Audit Risk'

The risk that an auditor will not discover errors or intentional miscalculations (i.e. fraud) while reviewing a company's or individual's financial statements. There are two general categories of audit risk – risk regarding assessment of the financial materials and risk regarding the assertions produced by evaluation of the financial materials.

Companies request an audit in order to provide confidence to investors that their financial statements and reporting are accurate. In order to insure against potential litigation arising from missed financial improprieties, such as material misstatements, auditors will typically carry malpractice insurance.

INVESTOPEDIA EXPLAINS 'Audit Risk'

Large public companies typically engage one of the Big Four accounting firms – PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte Touche Tohmatsu – for their internal audits. The Big Four was previously the Big Five, but Arthur Andersen fell out of the group after being indicted on counts of obstruction of justice for its role in the Enron scandal.

According to a 2008 Government Accountability Office report, the Big Four firms audit 98% of U.S. companies with annual revenues over $1 billion. Smaller companies are more likely to engage one of the "mid-range" firms, such as Grant Thornton or BDO Seidman.

RELATED TERMS
  1. Auditing Evidence

    The information collected for review of a company's financial ...
  2. Detection Risk

    The chance that an auditor will not find material misstatements ...
  3. Deficiency

    Conceptually, the numerical difference between the amount of ...
  4. Audit

    1. An unbiased examination and evaluation of the financial statements ...
  5. Generally Accepted Accounting Principles ...

    The common set of accounting principles, standards and procedures ...
  6. Auditor's Report

    Recorded in the annual report, the auditor's report tests to ...
Related Articles
  1. Investing Basics

    12 Things You Need To Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  2. Brokers

    How To Avoid Falling Prey To The Next Madoff Scam

    Due diligence does work, but the loose reporting standards for hedge funds make extra care and attention necessary.
  3. Personal Finance

    A Look At Accounting Careers

    More than just crunching numbers, this career blends detective work with trouble shooting.
  4. Professionals

    An Inside Look At Internal Auditors

    Find out why these number crunchers are part of every chief officer's dream team.
  5. Professionals

    Examining A Career As An Auditor

    Stricter government regulations have put auditing professionals in demand.
  6. Options & Futures

    Uncovering A Career In Forensic Accounting

    Does a job as a financial sleuth sound interesting to you? Dig in to learn more.
  7. Investing Basics

    What are Financial Statements?

    Financial statements are a picture of a company’s financial health for a given period of time at a given point in time. The statements provide a collection of data about a company’s financial ...
  8. Stock Analysis

    A New Economic Threat: State-Sponsored Hacking

    State sponsored hacking attempts are becoming a major cause of concern to the US. Here is a list of US sectors most vulnerable to state-sponsored hacking.
  9. Investing

    What's a Debit Note?

    A debit note is a document used by a seller to inform a purchaser of a dollar amount owed. As the name indicates, it is a note from the seller that a debit has been made to the purchaser’s account. ...
  10. Investing

    What's Capitalization?

    Capitalization has different meanings depending on the context.

You May Also Like

Hot Definitions
  1. Fixed-Charge Coverage Ratio

    A ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. It is calculated ...
  2. Efficiency Ratio

    Ratios that are typically used to analyze how well a company uses its assets and liabilities internally. Efficiency Ratios ...
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  5. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  6. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
Trading Center