QUESTION

ASA 200 (Objectives and General Principles Governing an Audit of a Financial Report) states that audit risk is a function of the risk of material misstatement of the financial report (or simply, the risk of material misstatement) and the risk that the auditor will not detect such misstatement.

Required:

a) Explain the three (3) components of audit risk and outline the impact an external auditor has on each of these components of audit risk.

b) Explain why it is important for the auditor to properly assess these risks. In your answer indicate how the assessment of these risks influences the auditors evidence collecting procedures.