Final answer:
The risk of material misstatement in an audit is composed of inherent risk and control risk. Inherent risk is about the susceptibility of financial statements to significant errors or fraud, while control risk pertains to the organization's internal control system's ability to prevent or catch such misstatements.
Step-by-step explanation:
The risk of material misstatement in an audit refers to the susceptibility of financial statements to significant misstatements due to errors or fraud before considering any related controls. Specifically, it consists of two components: inherent risk and control risk.
Inherent risk is the susceptibility of an assertion to a misstatement that could be material, either individually or when aggregated with other misstatements, assuming that there were no related controls. Control risk is the risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure, and that could be material, either individually or when combined with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the organization's internal control. These components are part of the audit risk model, which also includes detection risk. However, detection risk relates to the auditor's procedures and not to the client's components.
To answer the student's question directly, risk of material misstatement refers to a combination of A. Inherent risk and control risk in the context of an audit risk model.