ACCA Audit and Assurance (F8) Practice Exam

What is defined as the risk inherent to an entity that affects all levels?

1. Audit Risk

2. Business Risk

3. Operational Risk

4. Financial Risk

The correct answer is: Business Risk

Business risk is defined as the risk inherent to an entity that affects all levels. This type of risk encompasses the potential exposure to financial loss or failure that arises from the entity's decisions, operations, and external environment. Business risk can stem from various factors, including market fluctuations, competition, regulatory changes, and operational inefficiencies, and it has the potential to impact an organization overall, not just specific departments or functions. Understanding business risk is crucial for auditors and management alike, as it helps in assessing the overall risk profile of the entity. This comprehensive perspective allows for better strategic planning and risk management practices that can enhance the organization's resilience against unforeseen challenges. Other types of risks, such as audit risk, operational risk, and financial risk, are more specific in nature. Audit risk pertains to the risk that an auditor may issue an incorrect opinion on financial statements. Operational risk involves the risks associated with internal processes and systems failing. Financial risk focuses on the risks that affect an entity's financial condition or performance, such as liquidity risk or credit risk. While these risks can be significant, they do not encompass the broader scope and impact that business risk entails across the entire entity.