Question

The risk that the auditors will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

(1)Business risk.
(2)Engagement risk.
(3)Control risk.
(4)Detection risk.

Answer 1

Detection risk is the possibility that auditors will not detect a material misstatement in the financial statements, despite carrying out substantive procedures. It's addressed by auditors through detailed audit planning and effective execution of audit procedures to minimize this risk.

Step-by-step explanation:

The risk mentioned in the student’s question is known as detection risk. This type of risk occurs during an audit when an auditor fails to detect a material misstatement in the financial statements. Detection risk is part of the audit risk model, which also includes inherent risk and control risk. Inherent risk refers to the susceptibility of an account to misstatements without considering internal controls, while control risk pertains to the risk that a client's internal controls will not prevent or detect a misstatement.

Auditors aim to reduce detection risk through careful planning and performing effective substantive procedures. Lowering detection risk is crucial as it impacts the audit's quality and the auditor's ability to give an appropriate opinion on the financial statements.

(4) Detection risk. This is because it specifically describes the scenario where auditors, despite conducting substantive procedures, inaccurately conclude there is no material misstatement in an account balance when one actually exists.