Business risk, in relation to auditing, is the risk of an entity failing to achieve the expectations of the managers and owners with respect to the entity's financial performance. An increased business risk results in an increased inherent risk, as an increase in business risk means that there is an increased risk that losses may be concealed by using incorrect or inappropriate accounting practices. Auditors obtain an understanding of business risks and in particular, those business risks that may result in material misstatement of the financial statements (ISA315.30). Some of the factors auditors consider when evaluating business risk include the interaction of factors such as the sensitivity of the business of the entity to unexpected changes in the economy, the degree of dependence on major suppliers and customers, new product development, and the nature of the entity's industry and product.
It became fashionable in the later part of the 20th century, particularly amongst some of the larger accounting firms, to promote their audit methodology as one that was based on an analysis of business risk. This methodology has the apparent advantage of being able to create added value to the external audit as the auditor is able to advise on risk management at the same time as undertaking the audit of the financial statements. The auditing profession is still undecided as to the overall benefits of this methodology to the public at large, although many firms continue to promote this approach.
The approach taken in these pages is that business risk is considered as part of the evaluation of inherent risk and that an audit focussed on an analysis of audit risk and its components, which includes inherent risk, will result in an efficient and effective audit. An audit focussed on an analysis of business risk is not likely to be of additional benefit to the auditor in arriving at his/her opinion. Indeed, such a focus may detract from the primary objective of a financial statement audit: to provide an opinion on the financial statements [fn].
Notwithstanding the focus on audit risk, and as part of the evaluation of inherent risk, auditors obtain an understanding of the entity's process of identifying and dealing with business risk. 
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