Final answer:
Audit risk is the risk that a 'clean' opinion will be issued when financial statements are misstated. Imperfect information can affect price, quantity, and quality. Companies can reduce the risk of imperfect information through quality certifications, independent audits, and transparent disclosure of information.
Step-by-step explanation:
Audit risk refers to the risk that a 'clean' opinion will be issued when, in reality, the financial statements are materially misstated. It is the risk that auditors face in providing an opinion on the accuracy and completeness of a company's financial statements. The risk cannot be completely eliminated through appropriate sampling of transactions.
Imperfect information is a situation where buyers and sellers have different levels of information about a product or service. This can affect price, quantity, and quality in various ways. To reduce the risk of imperfect information, companies can use quality certifications, independent audits, and transparent disclosure of information.
For example, a company that has obtained a quality certification can assure buyers that its products meet certain standards, reducing the risk of buying a low-quality or defective product. Similarly, transparent disclosure of information allows buyers to make informed decisions based on accurate and complete information, reducing the risk of buying a product that doesn't meet their expectations.