What is the connection between business risk, financial statement risk and audit risk?

There is a connection between Business risk , Financial statement risk and Audit risk as explained below.

Business risk is any risk that threatens the ability of a business entity to achieve its objective, for example, to maximize shareholder profit. Anything that threatens this objective is normally consider a risk that profits might be lower.

For the auditor, the significance of business risk is the impact that it could have on the financial statement. Financial statement risk is the risk that the financial statement will not give a true and view due to misstatements and omissions. Most business risk increases the likelihood that the financial statement could  be materially wrong, for example,  an understatement of bad debts or the allowance for doubtful debts, over - stating the value of inventory etc.

Business risk is the risk that management must deal with while Audit risk is risk that faces the auditor. It is the risk that the auditor will give an  inappropriate audit opinion when the financial statements are materially wrong. Audit risk follows on from financial statement risk. As such , the auditor should assess the financial statement risks as a step towards assessing the audit risk.

In short, Business risk could lead to financial statement risk and financial statement risk affects audit risk. Audit risk results from Inherent ,Control and Detection risks.

Business Risk

After the audit there is might be possible that company bear losses rather then profits. Its occur due to fall in sale revenues, to day debts become bad debt in feature etc. Auditor have to consider business risk in his report also.

Financial Risk

If cash flows of company are not adequate to full fill creditors then company may get debt finance there would might be chance the share holder loss their investment. This kind of risk is known as Financial risk.

Audit risk

Auditor have risk base approach in his audit. He have systemic risk and deduction risk in his report. So the risk in audit report is known as audit risk.