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CA Intermediate · Auditing and Ethics · Risk Assessment and Internal Control

Auditor of Mehta Pharma Ltd is planning the audit and, in line with SA 315 (Revised), wants to identify risks of material misstatement. Which of the following is the correct description of the components of audit risk that the auditor assesses at the assertion level?

Audit risk has risk of material misstatement, made up of inherent risk and control risk, which exist in the entity independent of the audit. Detection risk is the risk that the auditor's procedures miss a material misstatement, and the auditor controls it through the nature, timing and extent of procedures.

  1. AInherent risk and control risk together form the risk of material misstatement; detection risk is the risk the auditor's procedures fail to detect itCorrect
  2. BControl risk and detection risk together form the risk of material misstatement; inherent risk is controlled by the auditor
  3. CInherent risk and detection risk together form the risk of material misstatement; control risk is set by management
  4. DSampling risk and non-sampling risk together form the risk of material misstatement

Explanation

Risk of material misstatement comprises inherent risk and control risk, which exist independently of the audit. Detection risk is the auditor's own risk of not detecting a misstatement, and is managed by the nature, timing and extent of procedures. The other options misassign the components.

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