ACCA Audit and Assurance (F8) Practice Exam

What term describes the risk that an auditor will express an inappropriate opinion on the financial statements?

1. Business Risk

2. Evaluation Risk

3. Audit Risk

4. Compliance Risk

The correct answer is: Audit Risk

The term that describes the risk that an auditor will express an inappropriate opinion on the financial statements is Audit Risk. This concept encompasses the possibility that the auditor may give a clean opinion when the financial statements contain material misstatements, whether due to fraud or error. Audit Risk consists of three components: inherent risk, control risk, and detection risk. Inherent risk is the susceptibility of an account balance or class of transactions to misstatement, while control risk is the risk that the internal controls will not prevent or detect misstatements. Detection risk is the risk that the auditor’s procedures will not detect a material misstatement that exists in a class of transactions or account balance. Together, these components illustrate how various factors can contribute to the risk of issuing an incorrect opinion. Understanding Audit Risk is crucial for auditors as it influences the nature, timing, and extent of their audit procedures. It informs the auditor's planning and the professional judgment involved in assessing the effectiveness of internal controls and the overall risk of material misstatements in the financial statements.