When an Auditor Increases the Assessed Level of Risk of Material

question 18

Multiple Choice

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective,the auditor would most likely increase the

• A) Extent of tests of controls.
• B) Level of detection risk.
• C) Extent of substantive tests.
• D) Level of inherent risk.

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Definitions:

Security Market Line

A graphical representation of the expected return of investments as a function of their risk, specifically their beta.

Expected Return

The average of all the possible returns for an investment, weighted by their respective probabilities.

Beta

A measure of a stock's volatility in relation to the overall market, used to gauge a stock's risk level relative to the market average.

Nondiversifiable Risk

A type of investment risk that is inherent to the entire market or market segment and cannot be eliminated through diversification.