Which statement about the audit risk components is true?

• A. The risk that material misstatement will not be prevented or detected on a timely basis by internal control can be reduced to zero by effective controls
• B. Detection risk is a function of the efficiency of an auditing procedure
• C. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
• D. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of the auditor.

Answer: (C)

Inherent risk is the chance that a material misstatement could occur in a financial statement assertion before considering any internal controls. Cash is highly attractive to thieves and easier to misappropriate, so its inherent risk is typically higher than that of many other assets, like coal inventory. Because of this greater inherent risk, the statement that cash is more susceptible to theft due to higher inherent risk is true.

The other ideas don’t hold. You can’t reduce the risk of misstatement to zero with controls; there will always be some residual risk because no system is perfect and there can be errors, overrides, or collusion. Detection risk isn’t simply about the efficiency of procedures; it reflects whether the auditor’s procedures are effective at finding misstatements, which depends on the nature, timing, and extent of those procedures. And auditors cannot freely change inherent risk or control risk for a client; those are characteristics of the entity and its internal controls. At best, auditors influence detection risk through their procedures, not the other two components.