ACCA Audit and Assurance (F8) Practice Exam

Which component of Audit Risk reflects the likelihood of a material misstatement not being detected by internal controls?

1. Inherent Risk

2. Control Risk

3. Detection Risk

4. Audit Risk

The correct answer is: Control Risk

Control Risk pertains to the likelihood that a material misstatement will occur in an assertion about a financial statement item and that it will not be prevented or detected by the entity's internal control system. This means that even with the existence of internal controls, there is an inherent possibility that these controls may fail to identify a material misstatement, thereby allowing an error or fraud to go unnoticed. Understanding control risk is crucial for auditors because it influences the nature, timing, and extent of the audit procedures necessary to gather sufficient appropriate evidence. High control risk indicates that the auditor may need to perform more substantive testing to mitigate the risk of material misstatement going undetected due to deficiencies in internal controls. Inherent risk, on the other hand, refers to the risk that material misstatement could occur in the absence of any internal controls, while detection risk is the risk that the auditor's substantive procedures will fail to detect a material misstatement that exists in an assertion. Audit risk encompasses the combination of inherent risk, control risk, and detection risk, essentially describing the overall risk an auditor faces in forming an opinion on the financial statements.