ACCA Advanced Audit and Assurance (AAA) Practice Exam

Audit risk can be defined as:

1. An auditor's investment risk

2. The risk of financial statement misrepresentation

3. The possibility of issuing an incorrect audit opinion

4. The probability of client financial success

The correct answer is: The possibility of issuing an incorrect audit opinion

Audit risk is fundamentally concerned with the possibility that an auditor may issue an incorrect audit opinion on the financial statements. This can occur due to various factors, including underlying errors or fraud in the financial reporting process. Therefore, it encapsulates the potential for the auditor to misstate the reliability of a client’s financial reporting, leading to a conclusion that does not reflect the true state of affairs. In the context of this definition, issuing an incorrect audit opinion can arise from both the inherent risk associated with the client’s business and the control risk stemming from the client’s internal controls. Hence, option C precisely captures the essence of audit risk, highlighting the crucial responsibility of the auditor to evaluate the validity of the financial statements to protect stakeholders. The other options do present relevant concepts but do not accurately define audit risk. Investment risk pertains to the financial risks associated with investing and is not specific to the context of auditing. The risk of financial statement misrepresentation is a component of audit risk but does not encompass the full scope, which includes the overall likelihood of an incorrect audit opinion. Finally, the probability of client financial success is unrelated to audit practices and instead addresses the client’s operational performance.