Final answer:
The term 'audit risk' refers to the possibility that an auditor may issue an incorrect opinion on financial statements due to a misstatement. An auditor assesses this risk to determine the auditing procedures needed to obtain a reasonable assurance that the financial statements are free of material misstatement.
Step-by-step explanation:
The term you are looking for which means that the auditor considers conditions that directly affect the auditee is audit risk. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. This concept is pivotal in planning and conducting an audit as it deals with understanding the entity and its environment, including the entity's internal control, and assessing the risks of material misstatement.
An auditor needs to assess these risks to determine the nature, timing, and extent of audit procedures required to provide a reasonable basis for expressing an opinion on the financial statements. This risk-based approach is crucial to efficiently allocate auditing resources to areas of higher risk and to design audit procedures that are responsive to the assessed risks.