Audit risk comprises inherent risk (susceptibility to error), control risk (failure of controls to prevent error), and detection risk (auditor missing existing errors). Auditors design procedures to reduce audit risk to acceptable levels, increasing testing where inherent or control risk is elevated. Complex derivative valuations present high inherent risk requiring specialized audit expertise. Audit risk models guide sampling strategies, substantive testing depth, and resource allocation. External auditors consider audit risk when issuing opinions on financial statements. Internal auditors apply similar concepts when planning audit coverage across the audit universe. Effective audit risk management balances thoroughness with efficiency.