What type of risks should be assessed when determining acceptable audit risk?

When determining acceptable audit risk, it is essential to assess both inherent and control risks because they collectively contribute to the overall risk of material misstatement in financial statements.

Inherent risk refers to the susceptibility of an account balance or class of transactions to material misstatement, assuming there are no related internal controls. This could stem from factors such as the complexity of transactions, the nature of the industry, or past experiences with similar audits.

Control risk, on the other hand, is the risk that a material misstatement will not be prevented or detected on a timely basis by the organization’s internal controls. This risk relates to the effectiveness of internal controls in mitigating inherent risks.

By evaluating both inherent and control risks, auditors can better understand the context in which the financial statements operate and thus determine the appropriate level of acceptable audit risk. This comprehensive risk assessment allows auditors to design their audit procedures effectively to achieve a reasonable assurance that any material misstatements are identified and addressed.

Focusing solely on inherent risk, control risk, or detection risk would limit the assessment and could lead to an incomplete understanding of the overall risk profile for the audit. Therefore, considering both inherent and control risks is crucial in establishing a solid foundation for audit planning and execution.