Question

Which of the following statements regarding risk is correct? A : There is an inverse relationship between the risk of material misstatement and detection risk. B : There is a direct relationship between the risk of material misstatement and detection risk. C : There is both a direct and inverse relationship between the risk of material misstatement and detection risk. D : There is neither an inverse nor direct relationship between the risk of material misstatement and detection risk.

Answer 1

The correct answer is letter C

Risk is a threat or danger of a particular occurrence. To take the risk is to be subject to a risky episode, that is, a reckless episode that may have some consequence.

In the financial world, risk is the investment's potential to not deliver the expected result. It can also mean the loss of most or all of the initial investment.

In the business world, financial risk refers to the company's indebtedness, that is, its ability to not honor financial obligations within the contracted time and terms.