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I know that question had asked us to evaluate principal audit risk ,but I want to know that what would the answer be if the question has asked financial statement risk or material misstatement risk,could you please write me in detail,
I am hope fully waiting for the replyRisk of material misstatement arises as a result of the product of inherent risk and control risk. Where controls are not strong or are unreliable, control risk is higher. Similarly, when there exist an unusually high number of inherent risks, again the auditor’s assessment of that (together with the control risk) will lead to the auditor setting detection risk at a lower figure in order to compensate for the high risk of material misstatement.
As a result of setting a low detection risk level, the auditor’s determination of the level / value of materiality will reduce and thus the extent of the auditor’s work will increase as more transactions will exceed this low materiality threshhold.
Does that help?
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