Question

Which of the following factors influence the risk of material misstatement?

a. Business risks.
b. Management incentives.
c. IT risks.
d. All of the above

Answer 1

The factors that influence the risk of material misstatement are business risks, management incentives, and IT risks.

Step-by-step explanation:

The correct answer is d. All of the above.

Factors that influence the risk of material misstatement include:

1. Business risks: These can include economic downturn, competition, regulatory changes, and changes in the industry that affect the financial position and performance of the company.
2. Management incentives: If management has incentives to manipulate financial statements, there is a higher risk of material misstatement. For example, if bonuses are tied to meeting certain financial targets, management may be incentivized to inflate revenues or understate expenses.
3. IT risks: With the increasing reliance on technology, IT risks such as system failures, data breaches, and inadequate controls can lead to material misstatements in the financial statements.