What is Planned Detection Risk?

Planned Detection Risk

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Planned Detection Risk

Planned Detection Risk, also known as Detection Risk, is a concept used in auditing. It refers to the risk that an auditor will fail to detect material misstatements in a company’s financial statements.

The risk is associated with the procedures and techniques that an auditor uses during an audit. If those procedures are not effective, there’s a risk that the auditor might not identify errors or irregularities that could materially affect the financial statements.

Detection risk is one of three elements that comprise audit risk, along with inherent risk and control risk:

The level of detection risk is inversely related to the levels of inherent and control risk. That is, the higher the inherent and control risks, the lower the acceptable level of detection risk, which means the auditor should gather more substantive evidence during the audit to reduce the detection risk. Conversely, if inherent and control risks are low, an auditor can accept a higher detection risk and therefore may gather less evidence.

Example of Planned Detection Risk

Suppose you’re an auditor for a large, multinational corporation. You’re planning your audit and assessing your audit risk, which includes your detection risk.

  • Inherent Risk: The company operates in an industry that’s highly susceptible to rapid changes in technology and market trends. This could lead to potential obsolescence of inventory, increasing the inherent risk.
  • Control Risk: Upon reviewing the company’s internal controls, you find that they’re generally strong. However, you identify some weaknesses in controls over inventory valuation due to inadequate reviews of the inventory obsolescence reserve. This contributes to control risk.

Given these assessments, the inherent and control risks are relatively high due to the industry’s volatility and control weaknesses over inventory valuation.

Remember, in reality, these assessments and determinations would involve much more detailed analysis and professional judgement. This is a simplified example to illustrate the concept of detection risk and how it fits into the overall audit risk model.

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