ACCA Advanced Audit and Assurance (AAA) Practice Exam

What type of risk do auditors assess to prevent material misstatements?

1. Operational risk

2. Market risk

3. Control risk

4. Financial sustainability risk

The correct answer is: Control risk

Auditors focus on control risk as it directly relates to the mechanisms and processes within a client's internal controls designed to prevent or detect material misstatements in financial reporting. Control risk reflects the likelihood that a material misstatement will not be prevented or detected promptly by the internal controls in place. In assessing control risk, auditors evaluate the design and effectiveness of these internal controls to determine whether they can reasonably ensure accurate financial reporting. If control risk is deemed high, auditors may need to perform more extensive substantive testing to gather enough evidence to support their opinions. This assessment is crucial in the audit risk model, where auditors combine inherent risk, control risk, and detection risk to evaluate the likelihood of material misstatements in financial statements. The other types of risks mentioned—operational risk, market risk, and financial sustainability risk—are not primarily the focus of auditors in the context of audits. While they may influence the overall risk profile of an organization, they do not specifically address the inherent concerns related to misstatements in financial reporting as control risk does. Therefore, understanding and evaluating control risk is key to the auditor's responsibility in minimizing the likelihood of material misstatements in the financial statements.