Final answer:
Audit risk is recognized by the statement in the auditor's standard report that the auditor assesses risks and forms an opinion. It refers to the risk that the auditor may issue an incorrect opinion on the financial statements despite conducting the audit correctly. Audit risk is assessed by considering factors such as the nature of the business and internal controls.
Step-by-step explanation:
The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor assesses risks and forms an opinion. Audit risk refers to the risk that the auditor may issue an incorrect opinion on the financial statements despite the audit being conducted in accordance with the relevant standards. It is an inherent risk in the audit process that cannot be completely eliminated.
Audit risk is assessed by the auditor by considering various factors, including the nature of the business, internal controls, and the likelihood of misstatements in the financial statements. The auditor then forms an opinion on whether the financial statements present a true and fair view of the company's financial position and performance.
For example, if the auditor identifies a high risk of material misstatements in the financial statements due to weak internal controls, they may allocate more resources to perform additional testing to mitigate the audit risk.