when conducting an audit or analyzing a business the auditor or analyst tries to gain an understanding of the nature of the business while examining control risks and inherent risks if inherent and control risks are considered to be high an auditor can set the detection risk to an acceptably low level to keep the overall audit risk at a reasonable level to lower detection risk an auditor will take steps to improve audit procedures through targeted audit selections or increased sample sizes 
companies operating in highly regulated sectors such as the financial sector are more likely to have higher inherent risk especially if the company does not have an internal audit department or has an audit department without an oversight committee with a financial background the ultimate risk posed to the company also depends on the financial exposure created by the inherent risk if the process of accounting for the exposure fails inherent risk is highest when management has to use a substantial amount of judgment and approximation in recording a transaction or where complex financial instruments are involved special considerationscomplex financial transactions such as those during the lead up to the financial crisis can be difficult for even the most intelligent financial professionals to understand asset backed securities such as collateralized debt obligations cdos became difficult to account for as tranches of varying qualities were repackaged again and again this complexity may make it difficult for an auditor to make the correct opinion which in turn can lead investors to consider a company to be more financially stable than in actuality inherent risk vs other audit risksinherent risk is one of the risks auditors and analysts must look for when reviewing financial statements but there are other audit risks that auditors must look out for on a regular basis we ve highlighted some of them below control risk is a type of risk that occurs when a financial misstatement results from a lack of proper accounting controls in the firm this means that there aren t enough internal controls or management in place to avoid risk put simply control risk occurs when there is a failure to review financial statements in other cases these precautions may be in place but don t function properly this type of risk can lead to increased lossesdetection risk occurs when auditors simply fail to detect an easy to notice error this may be a result of fraud or other errors detection risk may occur unintentionally in that an auditor may miss an error accidentally in other cases an auditor may misinterpret the figures on the financial statements they re charged with reviewing that it results in one or more errors 