Audit Risk

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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.

BREAKING DOWN '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.

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