Detection risk is actually the risk that the procedures applied by the auditors will fail to detect material misstatements in the financial statements.
"No risk, no business" is although a common proverb but every company seeks smooth way to profit maximization. They want to cut down the risk factor, for the business professionals risk is the thing which can be measured to some extent. Many auditors are there in every business entity whose job is to ensure accuracy and effectiveness in the business in regard to the asset management, transactions and their record in the financial statement. Besides this, the auditors seek for opting various methods from which they would be able to measure the future risk, the risk that may affect their business. Auditors use various methods to measure the risk, particularly the risk of material misstatement, those small left over part which escapes from the procedure applied by the auditors to measure the misstatement of materials will be considered as the detection risk.
Detection risk is linked up with the other links i.e. The business risk, material misstatement risk and its two components which are the control risk and the inherent risk. If the material misstatement risk increases, it will decrease the detection risk and the auditors risk increases. The material risk increases when its components control risk and inherent risk increases. The relationship of the risks will help the management and the auditors to attempt such various effective ways that will result in making all risk at a lower rate.
If the material misstatement risk increases, the auditor will put more procedure to know the reasons for this misstatement, in this sense the detection risk decreases.