Audit Risk Assessment: Types, Treatments & Best Practices

In this Article

Audit risk assessments are an integral part of any company’s internal control structure and are relevant to compliance frameworks, including SOC 2, HIPAA, and ISO 27001. Risk assessments can be daunting as they encapsulate risks across an entire company, and it can be difficult to understand what considerations should be taken and even where to start.

This blog provides an overview of the audit risk assessment in the context of compliance frameworks by outlining the purpose of audit risk assessments and exploring the three components of audit risk, along with practical considerations and guidance on how to calculate audit risk. We’ll also cover how organizations can conduct risk assessments by offering considerations for identifying risks. By using the four primary risk treatment strategies, avoiding common challenges, and following best practices, a risk assessment can be accurate, defensible, integrated into broader governance efforts, and ready for an audit.

Purpose Behind the Audit Risk Assessment

The purpose of an audit risk assessment across frameworks like SOC 2, HIPAA, and ISO 27001 is to help understand, prioritize, and respond to potential threats that could compromise the effectiveness of controls, compliance, and overall system integrity. Although frameworks can differ in focus, the underlying goal of a risk assessment is consistent: to identify where risk exists, evaluate the potential impact, and assess if appropriate controls are in place to mitigate or monitor those risks.

The Three Types of Audit Risk

There are three types of risks that make up “audit risk”: inherent risk, control risk, and detection risk. These risks represent different phases where material misstatements or significant errors may go unnoticed.

Inherent risk is the risk of an error, regardless of existing internal control mechanisms in place. This type of risk can be based on industry or geographic location. Example: A company hosts its data center in a location prone to hurricanes. Even with backups and disaster recovery plans in place, the underlying geographic exposure means the risk of disruption is inherently higher.
Control risk occurs when there is a possibility that a significant error could occur and would not be detected by the controls in place. Manual controls increase this risk more than well-configured automated controls. Example: A company performs a manual reconciliation each month. Though the reconciliation is performed, errors may slip through unnoticed due to the manual nature of the control.
Detection risk is the level of risk of a significant error occurring and the auditor not detecting it through audit procedures.

Together, these three types of risk determine the overall audit risk and provide guidance in planning an appropriate audit strategy.

Calculating Audit Risk

While audit risk is often expressed numerically, these figures are rooted in qualitative judgment rather than mathematical formulas. First, a consistent risk rating scale will need to be defined. Then apply the scale by assessing (1) inherent risk, (2) control risk based on control design, implementation, and operating effectiveness, and finally, (3) estimate detective risk as well. Suppose the company is in a risky industry, and controls are not expected to detect significant errors. In that case, more audit procedures will need to be performed (e.g., larger sample sizes) to examine the processes. This not only strengthens the audit’s credibility but also helps the company demonstrate trustworthiness to its clients and stakeholders.

While it is critical for an auditor to be able to assess audit risk to understand the level of effort and additional audit procedures that may be required, the assessment of audit risk can be beneficial to the company’s management as well by determining if there are gaps in processes where controls should be. Audit risk may highlight the overarching risk of an audit, but may also bring attention to singular areas or groupings of controls that require strengthened procedures.

Performing the Risk Assessment

An audit risk assessment will usually cover the risks of a company, but can be organized by type of risk or relevant department. Risk assessment can be reviewed on a periodic basis or can be maintained as a live document. There are benefits to both; by revisiting the document periodically, it is useful for historical comparisons of risk identifications. Whereas live documents provide fewer historical comparisons but allow a timelier update and assessment of newly developed risks.

Several topics come to mind when beginning the brainstorming session for your risk assessment. Here are some questions to consider:

What concerns and threats keep you up at night?
What are the ways that fraud could occur?
What risks do you have with third parties?
What concerns do you have with economic risk?
If you work in person or host your environment, what physical risks do you have?

Afterward, begin considering recent events and industry trends. Some considerations are:

Is the company prepared to work remotely, if needed?
Is artificial intelligence utilized in the service that is provided?

For each risk identified, consider assigning a level of likelihood and impact to establish a risk ranking. A consistent risk-ranking formula will guide management when assessing and developing risk treatment plans.

The Four Pathways of Treating Risks

There are four options for treating risks, which can be followed individually or combined.

Risk avoidance indicates that the company will perform an action that removes the risk altogether. Example: A company chooses not to collect personal data from users to avoid the regulatory and privacy risks.
Risk modification is achieved by modifying the likelihood of the risk or the impact of the occurrence. Example: A company implements an automated inactivity lockout on workstations to lessen the risk around workstation safeguarding. While the risk still exists, its likelihood and potential impact are reduced.
Risk sharing divides the risk among other parties. Example: A company outsources analytics processing to a SOC 2-compliant vendor. By doing this, the company shares the risk of handling analytical data while contractually requiring the vendor to maintain specific security standards.
Risk retention is the act of accepting the risk as is. Example: A company decides not to invest in an automated backup tool, recognizing that the cost outweighs the possible consequences. The team documents the risk and establishes a manual backup and recovery plan.

Challenges of the Audit Risk Assessment

Audit risk assessments present several challenges that can complicate their accuracy and effectiveness. One difficulty lies in the subjectivity of risk ratings. These judgments can vary significantly between members of management, especially if some members are unaware of the history of risks. Additionally, risks can be missed altogether because of rapidly changing threat landscapes or because of time and resource constraints.

Risk Assessment Best Practices

Following established best practices transforms audit risk assessments from routine compliance exercises into strategic tools that strengthen your organization’s risk posture and audit readiness.

Alignment

When management performs an audit risk assessment, best practices assist in providing a risk assessment that is structured, defensible, and aligned with both internal and external audit expectations. First, it’s important to align the assessment with a recognized risk management framework, such as COSO, NIST, or the AICPA Trust Services Criteria for SOC 2. Defining risk categories and using a consistent risk scoring scale helps to maintain uniformity in how risks are evaluated and compared.

Attendees

Engaging cross-functional members of management is essential. Risk assessments are more effective when inputs are gathered from different departments, such as information technology, human resources, compliance, and legal. These varied perspectives help management avoid blind spots and identify risks that may otherwise be overlooked.

Action

For each identified risk, management should document the chosen response strategy and clearly link each risk to specific controls, policies, and risk owners.

Auditable

Equally important is the maintenance of version-controlled documentation. Keep a record of when the assessment was completed, who was involved, and what changes occurred, making sure it is auditable. Management should review and update the risk assessment regularly, or when there are major changes to the business. This ongoing review reflects a proactive risk culture and demonstrates strong governance.

Applied

Audit risk assessments should not be treated as isolated exercises. They should feed into broader enterprise risk management and compliance processes, serving as a foundation for internal control planning, incident response, and strategic decision-making.

Key Takeaways for Effective Audit Risk Assessment

An audit risk assessment is a foundational step in understanding and managing threats that could compromise an organization’s controls, compliance posture, or overall system integrity. By identifying and evaluating risks, procedures can be tailored to address the areas of greatest concern. This assessment can inform the audit approach, help management uncover control gaps, prioritize treatment strategies, and strengthen risk governance.

While challenges such as subjectivity and evolving threats exist, structured methodologies and best practices, such as maintaining auditable documentation and integrating risk assessments into broader compliance programs, help maintain accuracy and alignment. Ultimately, a well-executed audit risk assessment supports proactive decision-making and increases trust with auditors, clients, and stakeholders.

If you have any questions related to audit risk assessments or compliance related to SOC 2 audits, ISO 27001 certification, or HIPAA audits, please contact me to discuss.

Please check out our related blogs for more information on audit risk assessment:

Hilary Stavrakas

Hilary has eight years of IT audit and assurance experience. Prior to starting at Linford & Co, Hilary worked for Deloitte managing audit readiness assessments, Sarbanes-Oxley 404 and SOC examinations, and complex remediation procedures. Hilary is a certified information systems auditor (CISA), holds a Master’s Degree in Accounting from the University of Colorado-Denver and a Bachelor’s in Business Administration from Colorado State University.