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CMA Intermediate · Corporate Accounting and Auditing · Brief Introduction to Auditing Standards

As explained in SA 200, which statement about detection risk is correct?

Detection risk can only be reduced and never eliminated, because an audit has inherent limitations. Even with extensive procedures some detection risk always remains. Therefore the claim that testing every transaction removes it is wrong, as are the descriptions that confuse it with business risk.

  1. AIt can be eliminated completely if the auditor tests every transaction
  2. BIt can only be reduced, not eliminated, because of the inherent limitations of an auditCorrect
  3. CIt is the risk that the auditor's business suffers loss from litigation
  4. DIt is the risk that the auditor reports a material misstatement when none exists

Explanation

SA 200 states that detection risk can only be reduced, not eliminated, because of the inherent limitations of an audit, so some detection risk always remains. Eliminating it by testing everything is not possible. Litigation loss is a business risk, which audit risk does not cover.

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