Final answer:
The risk of material misstatement combines inherent risk and control risk, which are pivotal components of the audit risk model.
Step-by-step explanation:
The risk of material misstatement in an audit risk model refers to the combination of two specific components: inherent risk and control risk. Inherent risk is the susceptibility of an assertion about a class of transactions, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Control risk pertains to the risk that a misstatement that could occur in an assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented or detected and corrected on a timely basis by the entity's internal control.
Risk of material misstatement refers to the risk that there are material misstatements in the financial statements of a client. It is a combination of two components in the audit risk model, namely, the inherent risk and the control risk.
Inherent risk refers to the susceptibility of a client's financial statements to material misstatements, without considering the effectiveness of internal controls. For example, if a client operates in a highly regulated industry, there may be a higher inherent risk due to complex accounting requirements.
Control risk relates to the risk that the client's internal controls are not effective in preventing or detecting material misstatements in the financial statem