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What is engagement risk and how does it differ from audit risk?

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Answer

Engagement risk is the overall risk to the audit firm from associating with a client—including audit risk plus business/reputational and litigation risk (e.g., a client in financial distress or with integrity concerns). It's considered at acceptance/continuance. Audit risk is narrower: the risk of an inappropriate opinion on the statements.
Real-world example A prospective client with integrity red flags has high engagement risk, so the firm may decline despite manageable audit risk.

Common follow-ups: When is engagement risk assessed? | How can high engagement risk affect acceptance?

Ethics & Independence Audit Objectives & Types Audit Risk & Materiality
All 18 Audit Risk & Materiality questions