Question

Which of the following statements regarding risk is correct?

1) The higher the inherent risk, the lower the control risk is likely to be.
2) The higher the inherent risk, the higher the control risk is likely to be.
3) There is no set relationship between inherent risk and control risk.
4) The higher the control risk, the lower the inherent risk is likely to be.

Answer 1

The correct answer is that there is no set relationship between inherent risk and control risk, as they are independent components of audit risk.

Step-by-step explanation:

The correct statement regarding risk and its types in the context of this question is option 3: There is no set relationship between inherent risk and control risk. Inherent risk refers to the exposure to misstatements in financial statements assuming no related internal controls are in place, whereas control risk pertains to the risk that a misstatement that could occur will not be prevented, detected, or corrected by the organization's internal control system. Both types of risk are components of audit risk, but they operate independently. Therefore, the level of inherent risk does not directly affect the level of control risk, and vice versa.