Audit risk is a category of business risk?

Question

BlackTom AI · Accepted Answer

Statement analysis often starts by identifying what each term means in context.
Option True: 'Audit risk is a category of business risk?' This is misleading because audit risk pertains to the risk that the auditor expresses an inappropriate opinion on financial statements, not a direct category of the broader business risks a company faces (such as market risk, liquidity risk, or operational risk). Treating audit risk as a general business risk confuses the scope of what the auditor evaluates with the risks the business itself encounters.
Option False: 'Audit risk is a category of business risk?' Under typical auditing and risk-management frameworks, audit risk is distinct from business risk. It is specifically the risk within the audit process that the financial statements are misstated to a level that could mislead users, and it is analyzed using the audit risk model (AR = IR × CR × DR) rather than being categorized among business risks. This makes the assertion in the statement incorrect, because audit risk is not a broad category of business risk but a specific term used in the auditing context.
Additional nuance: Some readers might think of 'business risk' as encompassing all risks a company faces, including those that could affect financial reporting. However, audit risk, as defined in auditing standards, remains a descriptive term for the risk to auditors, not a standalone category within the taxonomy of business risks. Therefore, the classification in the question does not align with standard definitions.

ACCT90014_2025_SM1 ACCT90014 MST Practice Quiz 1

Audit risk is a category of business risk?

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