ACCA Advanced Audit and Assurance (AAA) Practice Exam

The term detection risk refers to:

1. The auditor's overall performance risk

2. The failure of an auditor to spot existing misstatements

3. The operational efficiency of the audit process

4. The validity of external audit opinions

The correct answer is: The failure of an auditor to spot existing misstatements

Detection risk specifically pertains to the possibility that an auditor may fail to identify material misstatements in a financial statement, whether due to fraud or error. This concept forms a critical part of the audit risk model, which helps auditors determine the risk of their procedures failing to catch issues that could affect the financial statements significantly. When considering this in the context of an audit, detection risk is influenced by the effectiveness of the auditor's testing procedures and the overall limitations inherent in sampling and other audit methods. Since auditors cannot test every transaction, there is always a risk that some misstatements may go undetected, which is precisely what detection risk encapsulates. Each of the other options touches on broader aspects of the auditing process but does not specifically define detection risk. The overall performance risk of the auditor, the operational efficiency of the audit process, and the validity of external audit opinions encompass various factors that do not honed in on the specific risk of failing to detect material misstatements. Understanding detection risk is essential for auditors to tailor their approach and ensure a thorough examination of the financial statements.