Auditing Theory Practice Exam 2025 - Free Auditing Practice Questions and Study Guide

The correct answer reflects a fundamental aspect of an auditor's role in the auditing process. An auditor has the responsibility to identify and assess the risks of material misstatement in financial statements, whether due to error or fraud. This risk assessment process is crucial as it helps in designing the nature, timing, and extent of audit procedures to respond appropriately to identified risks.

The identification and assessment of risks allow auditors to focus their efforts on areas of greater concern, ensuring that the audit provides the necessary assurance regarding the accuracy and fairness of the financial statements. This process is based not only on the company's internal controls but also on understanding the entity's environment, industry risks, and other factors that could lead to significant misstatements.

In contrast, ignoring potential fraud risks or only assessing risks related to internal controls would not provide a complete picture of the risks involved. Additionally, attempting to eliminate all risks before conducting the audit is not feasible, as some level of risk is inherent in any auditing environment. The auditor's goal is to manage and respond to these risks effectively, rather than eliminate them entirely.