Control riskrefers to the risk that an organization’s internal controls will fail to prevent or detect material misstatements in a timely manner.
The effectiveness of internal controls directly influences control risk. If controls are weak or poorly designed, the risk increases.
Why Is Option B Correct?
The primary focus of control risk is the adequacy and effectiveness of an entity’s internal controls. Effective controls reduce the likelihood of material misstatements, while deficiencies increase control risk.
Why Other Options Are Incorrect:
A. Inherent Risk:This is the risk of material misstatements due to the nature of the business or transactions, independent of controls.
C. Detection Risk:This refers to the risk that auditors will fail to detect material misstatements. It is influenced by the nature and extent of audit procedures, not internal controls.
D. Audit Risk:This is the overall risk that an auditor will issue an incorrect opinion. It combines inherent, control, and detection risks.
References and Documents:
AICPA Standards on Audit Risk (AU-C 315):Explains control risk and its relationship to the effectiveness of internal controls.
GAO Yellow Book:Emphasizes assessing control risk when evaluating internal controls in audits.
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