Audit risk
Encyclopedia
Audit risk refers to acceptable audit risk, i.e. it indicates the auditor's willingness to accept that the financial statement
s may be materially misstated after the audit
is completed and an unqualified (clean) opinion was issued. If the auditor decides to lower audit risk, it means that he wants to be more certain that the financial statements are not materially misstated.
AR = IR*CR*DR
where... IR is inherent risk
, CR is control risk and DR detection risk is the conditional probability
that the auditor does not detect a material misstatement in the F/S, given that one exists.
DR is split between two components; SR (Sampling Risk) and NSR (Non-Sampling Risk)
Unlevered beta requires the ratio between the equity value
and the value of the firm measured in market value
terms.
When a company has no debt, i.e. is unlevered, its asset beta is obviously equal to its equity beta.
Financial statement
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...
s may be materially misstated after the audit
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
is completed and an unqualified (clean) opinion was issued. If the auditor decides to lower audit risk, it means that he wants to be more certain that the financial statements are not materially misstated.
AR = IR*CR*DR
where... IR is inherent risk
Inherent risk
Inherent risk, in the audit of financial statements, is the risk that the account, disclosure or financial statement note being attested to by an independent CPA firm is materially misstated without considering internal controls due to error or fraud...
, CR is control risk and DR detection risk is the conditional probability
Conditional probability
In probability theory, the "conditional probability of A given B" is the probability of A if B is known to occur. It is commonly notated P, and sometimes P_B. P can be visualised as the probability of event A when the sample space is restricted to event B...
that the auditor does not detect a material misstatement in the F/S, given that one exists.
DR is split between two components; SR (Sampling Risk) and NSR (Non-Sampling Risk)
- SR is the risk that the sample selected by the auditor does not properly reflect the population of the data being sampled. The conclusion drawn from such a sample will therefore not be applicable to the entire population.
- NSR is the detection risk other than SR that the auditor will not detect a material misstatement. This could be due to a variety of reasons eg. human error.
Inherent risk
Inherent risk can also be considered as Significant risks.Unlevered beta requires the ratio between the equity value
Equity value
Equity value is the value of a company available to owners or shareholders. It is the enterprise value plus all cash and cash equivalents, short and long-term investments, and less all short-term debt, long-term debt and minority interests....
and the value of the firm measured in market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
terms.
When a company has no debt, i.e. is unlevered, its asset beta is obviously equal to its equity beta.