Final answer:
The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is called the audit risk. Audit risk is the risk that the auditor issues an incorrect audit opinion.
Step-by-step explanation:
The risk the auditor is willing to take of accepting a balance as correct when the true misstatement in the balance under audit is greater than the tolerable misstatement is called the audit risk. Audit risk is the risk that the auditor issues an incorrect audit opinion. It is a combination of inherent risk, control risk, and detection risk.
Audit risk can be managed by setting a materiality level and applying appropriate audit procedures. If the auditor determines that the risk of material misstatement exceeds the tolerable misstatement, further audit procedures should be performed to reduce the risk of issuing an incorrect audit opinion.
For example, if the tolerable misstatement is $10,000 and the auditor identifies a potential misstatement of $20,000, it would be prudent to perform additional audit procedures to determine the accuracy of the balance before issuing an audit opinion.