Final answer:
Risk response at the financial statement level is influenced by factors like the control environment, the risk of material misstatement due to fraud, auditor's professional skepticism, and estimations of the risk of material misstatement.
Step-by-step explanation:
The factors that affect risk response at the financial statement level include an auditor's understanding of the entity's control environment, the assessed risk of material misstatement due to fraud, the audit team's commitment to maintaining professional skepticism, and estimations regarding the likelihood of material misstatement.
The control environment is crucial as it sets the tone of the organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control.
Assessing the risk of material misstatement due to fraud is essential as it directly affects how the auditor plans and conducts the audit. Large risks may require more evidence and a more thorough examination of the affected areas.
Maintaining professional skepticism is necessary to critically assess audit evidence and remain alert to instances that may indicate material misstatement due to error or fraud.
Lastly, when estimating a high risk of material misstatement, an auditor may decide to lower the detection risk by increasing the substantive testing of transactions and balances to respond to the assessed level of risk.