Question

Client risk as defined in the text is:

1) the auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
2) the overall risk of material misstatement.
3) the risk that audit procedures will fail to detect material misstatements.
4) the risk of the entity's financial failure.

Answer 1

Client risk is the risk that audit procedures will fail to detect material misstatements in the financial statements audited and reported upon.

Step-by-step explanation:

The correct definition for client risk as mentioned in the text is option 3) the risk that audit procedures will fail to detect material misstatements.

Client risk refers to the risk the auditor faces of not being able to detect material misstatements in the financial statements audited and reported upon. This means there is a possibility that the auditor's procedures may not identify errors or fraud in the financial statements.

For example, if the auditor fails to detect a material misstatement in the financial statements, it could lead to incorrect financial reporting and financial loss for stakeholders.