The standards require that auditors assess the risk of material misstatement when planning their audit and design their tests of controls and substantive procedures in response to the assessed risks. It is common for auditors to begin their risk assessment by considering the business risks that the company faces.

a. What is meant by the term “business risks” as it relates to the auditor’s risk assessment?

b. Why do auditors take this approach?

c. Think of any two business risks that that a company might face. Identify them and explain how an auditor might respond to these risks during the audit.