Final answer:
Risk response at the financial statement level is influenced by 2.the auditor's understanding of the entity's control environment and their assessment of the risk of material misstatement due to fraud.
Step-by-step explanation:
Risk response at the financial statement level is affected by the auditor's understanding of the entity's control environment and the assessed risk of material misstatement due to fraud. This understanding influences how auditors plan and execute their audit to ensure the financial statements are free of material misstatements, whether caused by error or fraud. Auditors assess the risk at the financial statement level by evaluating the design and implementation of the entity's internal controls, and also by considering any relevant historical information such as previous audits and known issues within the industry or the entity itself. A strong control environment can lower the perceived risk, which may affect the nature, timing, and extent of audit procedures. In contrast, a weak control environment can increase the assessed risk, leading to more extensive audit procedures.
The answer to the student's question is option 2, 'the auditor's understanding of the entity's control environment and the assessed risk of material misstatement due to fraud'.
SUMUP all the final answer as points at last:
- The risk response is influenced by the auditor's understanding of the entity's control environment.
- Assessing the risk of material misstatement due to fraud is critical in planning the audit.
- A strong control environment may lead to less extensive audit procedures, and a weak one to more.