Audit risk and compliance: What businesses need to know

Audit risk is the risk that an auditor issues an incorrect opinion because a material misstatement is not identified during the audit.

Audit risk is assessed by looking at three key components:

• Inherent risk – some areas are naturally more prone to error or manipulation, such as estimates, provisions, or asset impairments.
• Control risk – the risk that a company’s internal controls fail to prevent or detect errors. Weaker controls increase control risk.
• Detection risk – the risk that audit procedures do not identify a material misstatement.

Auditors assess these risks together to design an audit that focuses on the areas that matter most. 

Auditors test internal controls using four main methods:

• Inquiry – speaking with staff to understand how controls operate
• Observation – watching controls being performed
• Inspection – reviewing documents and records
• Reperformance – independently re‑doing a control to check it works

These tests help auditors determine whether controls are designed effectively and operating as intended. 

Materiality is a threshold auditors use to decide what really matters in the financial statements. Auditors are not trying to find every small error.

An issue is considered material if it could influence the decisions of someone relying on the accounts. If an error wouldn’t change a user’s decision, it is unlikely to be material. 

An audit is not designed to detect all fraud, but it should identify material fraud where it exists.

Auditors assess fraud risk as part of audit planning, apply professional scepticism throughout the audit, and perform targeted procedures such as:

• Journal entry testing
• Reviewing accounting estimates
• Testing areas where management override is possible

Despite this, fraud can be difficult to detect, especially where there is deliberate concealment. 

Audit findings typically fall into three main areas:

1. Control findings
These may include weak segregation of duties, lack of evidence of review, or IT access issues.

2. Financial statement findings
Common examples include transactions recorded in the wrong period (cut‑off errors) or overly optimistic estimates.

3. Governance and process findings
These can include late financial close processes, poor documentation, or weak forecasting and oversight.

Identifying these issues early helps organisations strengthen controls and reduce future risk. 

Bishop Fleming takes a risk‑based audit approach, focusing on the areas that pose the greatest risk to your organisation. 

We combine technical expertise, clear communication, and practical recommendations to help you strengthen controls, improve governance, and meet your regulatory obligations with confidence.