What is the Difference Between Audit Risk and Business Risk?
🆚 Go to Comparative Table 🆚The main difference between audit risk and business risk lies in their nature and the parties responsible for managing them. Here are the key differences:
Audit Risk:
- Audit risk is the risk that an auditor's opinion on the financial statements is inappropriate or incorrect.
- It is calculated using a model that multiplies inherent risk, control risk, and detection risk.
- Inherent risk, control risk, and detection risk are all components of audit risk.
- Audit risk is reviewed at the time of preparing audit reports.
- Internal and external auditors are responsible for identifying audit risk.
Business Risk:
- Business risk is the uncertainty of obtaining profits or the possibility of loss, and the occurrence of factors that could hinder the goals and objectives of the company.
- It includes factors such as financial risk, cash flow issues, high risk of theft and fraud, increased production costs, lack of financing, decline in demand, loss of profitability, legal issues, increased competition, and decrease in customers.
- Business risk is directly assessed by assessing the risks to the business from both internal and external factors.
- It should be reviewed continuously due to its recurring nature.
- The management is responsible for identifying business risk.
In summary, audit risk is concerned with the accuracy of financial statements and is the responsibility of auditors, while business risk encompasses various factors that could affect a company's objectives and goals, and is managed by the company's management.
Comparative Table: Audit Risk vs Business Risk
Here is a table comparing Audit Risk and Business Risk:
| Aspect | Audit Risk | Business Risk |
|---|---|---|
| Definition | The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. | The risk resulting from significant conditions, events, or circumstances that could adversely affect an entity's ability to achieve its objectives. |
| Scope | Focuses on the financial statements and the auditor's opinion. | Encompasses various factors that could hinder the goals and objectives of the company during the course of its operations. |
| Factors | Inherent risk, control risk, and detection risk. | High financial risk, cash flow issues, theft and fraud, increase in production cost, lack of financing, decline in demand, loss of profitability, legal issues, increased competition, decrease in customers, overtrading, and political or economic instability. |
| Influence | Audit risk is influenced by the nature and extent of audit procedures performed. | Business risk is influenced by competition, changes in economic and political conditions, regulation changes, and operational inefficiency. |
| Relation to Financial Statements | Audit risk is directly related to the auditor and the potential misstatement, error, or omission in the financial statements. | Business risk is not directly related to the financial statements but rather to the company's overall performance and long-term success. |
In summary, audit risk is concerned with the potential inaccuracies in financial statements and the auditor's role in identifying and addressing them, while business risk encompasses a broader range of factors that could impact a company's ability to achieve its objectives and long-term success.
- Business Risk vs Financial Risk
- Audit vs Assurance
- Accounting vs Auditing
- Risk vs Threat
- Financial Audit vs Management Audit
- Risk vs Issue
- Crisis Management vs Risk Management
- Audit vs Research
- Internal Audit vs External Audit
- Risk vs Vulnerability
- Risk vs Uncertainty
- Review vs Audit
- Audit vs Evaluation
- Hazard vs Risk
- Information System Audit vs Information Security Audit
- Accountant vs Auditor
- Internal vs External Audit
- Danger vs Risk
- Risk vs Challenge