Detection Risk

AAA

DEFINITION of 'Detection Risk'

The chance that an auditor will not find material misstatements relating to an assertion in an entity's financial statements through substantive tests and analysis. Detection risk is the risk that the auditor will conclude that no material errors are present when in fact there are. Detection risk is one of the three elements that comprise audit risk, the other two being inherent risk and control risk.

INVESTOPEDIA EXPLAINS 'Detection Risk'

Exhaustive substantive tests and analysis may reduce the level of detection risk. Detection risk also depends on the quality of the auditors - the lower the quality of the auditor, generally the higher the detection risk. Detection risk may also be higher in regions where regulatory bodies are relatively ineffective.

RELATED TERMS
  1. Audit Risk

    The risk that an auditor will not discover errors or intentional ...
  2. Cook The Books

    A buzzword describing fraudulent activities performed by corporations ...
  3. Audit

    1. An unbiased examination and evaluation of the financial statements ...
  4. Material Weakness

    When one or more of a company's internal controls, put in place ...
  5. Auditor's Report

    Recorded in the annual report, the auditor's report tests to ...
  6. Negative Option Deals

    A dubious business practice that involves supplying a typically ...
RELATED FAQS
  1. Why is the use of contra accounts so important for maintaining ledgers?

    Contra accounts have been used in financial accounting to verify the balance of another corresponding account since Renaissance ... Read Full Answer >>
  2. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    After a prolonged period of corporate scandals involving large public companies from 2000 to 2002, the Sarbanes-Oxley Act ... Read Full Answer >>
  3. How is deferred revenue treated under accrual accounting?

    In accrual accounting, deferred revenue, or unearned revenue, represents a liability on the balance sheet recorded on funds ... Read Full Answer >>
  4. What are some of the advantages and disadvantages of absorption costing?

    Companies must choose between using absorption costing or variable costing in their accounting systems. There are advantages ... Read Full Answer >>
  5. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  6. Why does zero-based budgeting require ongoing evaluation and management?

    Zero-based budgeting must have ongoing evaluation and management due to the fact a zero-based budget requires management ... Read Full Answer >>
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. Economics

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  4. Economics

    Understanding the Accounting Cycle

    An accounting cycle consists of the traditional procedures performed to record business events and transactions in a company’s accounting records.
  5. Fundamental Analysis

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  6. Fundamental Analysis

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  7. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  8. Economics

    What's Involved in Customer Service?

    Customer service is the part of a business tasked with enhancing customer satisfaction.
  9. Economics

    What is Involved in Inventory Management?

    Inventory management refers to the theories, functions and management skills involved in controlling an inventory.
  10. Economics

    What are Noncurrent Assets?

    Noncurrent assets are property that a company owns that will last for more than one year.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center