What type of risk is related to the possibility that errors or fraud could lead to material misstatements?

Prepare for the Certified Government Auditing Professional Test. Utilize flashcards and multiple choice questions with explanations and hints for thorough exam readiness.

The concept of audit risk encompasses various components, one of which is the risk that errors or fraud could result in material misstatements in financial statements. This type of risk highlights the possibility that, despite an auditor’s efforts in examining the financial statements, there remains a chance that significant errors or fraudulent activities might not be detected, leading to the issuance of an incorrect audit opinion.

Audit risk is intrinsically composed of inherent risk, control risk, and detection risk. Inherent risk pertains to the likelihood of material misstatements due to the nature of the entity and its environment without considering any controls. Control risk involves the chance that a material misstatement could occur in a transaction and not be prevented or detected by the organization's internal control system. Detection risk, on the other hand, is the risk that the auditor’s procedures will fail to detect a material misstatement.

By encompassing the possibility of errors and fraud leading to material misstatements, audit risk specifically captures the comprehensive view of risks auditors face, including those that could emerge from inherent and control risks paired with the auditors' detection capabilities. Thus, identifying audit risk is crucial for auditors to develop an effective audit strategy that adequately addresses those significant risks.

Subscribe

Get the latest from Examzify

You can unsubscribe at any time. Read our privacy policy