In accounting, it is a type of risk that reflects the probability that an entity’s financial statements would be experience material misstatement due to flawed internal controls applied by the entity. Failure in internal controls (weak or non-existent controls) may give room for occurrence of error or fraud as to an assertion and that could be material, either on an individual basis or in combination with other misstatements. If such errors or fraud situations are not prevented or detected on a timely basis or pre-emptively by internal controls, a control risk arises.
Therefore, control risk is perceived as a function of the effectiveness of the design and operation of internal controls: the more effective these controls, the lesser the control risk, and vice versa.
Control risk is a component (in addition to inherent risk) of the risk of material misstatement at the assertion level.
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