Audit Risk Is the Risk That an Auditor Expressan Inappropriate

question 31

Essay

Audit risk is the risk that an auditor expressan inappropriate audit opinion when the financial statements are materially stated. Why is the concept of audit risk so important to auditors and what can they do to reduce it to an acceptably low level?

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Definitions:

Agent

In economics, an agent is an individual or entity that makes decisions, often in the context of trading or negotiating, on behalf of another person or group.

Informational Asymmetry

A situation where one party in a transaction has more or superior information compared to another. This often leads to an imbalance in power or decision-making.

Hidden Action

A situation in principal-agent relationships where the agent's actions are not fully observable by the principal, potentially leading to agency problems.

Hidden Characteristic

A quality of a product or service that is not immediately observable to the buyer, often leading to information asymmetry in the market.