Certified Government Financial Manager (CGFM) 2026 – 400 Free Practice Questions to Pass the Exam

In assessing audit risk, it is essential to understand the components that directly contribute to the likelihood that an auditor may issue an incorrect opinion on financial statements. The primary elements included in this assessment are inherent risk, control risk, and detection risk.

Inherent risk refers to the susceptibility of an account balance or class of transactions to misstatement, assuming that there are no related internal controls. This acknowledges that certain situations or transactions are more prone to errors or fraud by nature.

Control risk involves the possibility that a material misstatement could occur in an account or transaction and not be prevented or detected on a timely basis by the entity's internal control system. This aspect highlights the effectiveness of the organization's internal controls in mitigating risks.

Detection risk is the risk that an auditor fails to detect a material misstatement in the financial statements during the audit process. This can be influenced by various factors such as the nature and timing of audit procedures and the inherent limitations of the audit itself.

By focusing on these three dimensions—inherent risk, control risk, and detection risk—auditors can form an overall assessment of audit risk and plan their audit procedures accordingly to address areas of higher risk, ensuring an effective audit approach. Understanding how these components interact allows auditors to be more precise