In identifying risks that may result in material misstatements sue to fraud, auditors should consider:

Question

Options

• Atype of risk
• Bsignificance of risk
• Cpervasiveness of risk
• DAll of the above

• A
  5% (1)
• B
  5% (1)
• C
  10% (2)
• D
  81% (17)

Explanation

Option D is correct because auditing standards (AU-C Section 240 / ISA 240) require auditors to evaluate all three dimensions of fraud risk - type, significance, and pervasiveness - when assessing the likelihood of material misstatement due to fraud. Each factor serves a distinct purpose: type identifies what kind of fraud risk exists (e.g., fraudulent financial reporting vs. misappropriation of assets); significance gauges how large the potential misstatement could be; and pervasiveness determines how broadly the risk affects the financial statements - whether it's isolated to one account or cuts across multiple areas. Options A, B, and C are not wrong on their own - they're simply incomplete, as omitting any one factor would give an auditor an inadequate picture of the risk.

Memory tip: Think of the three factors as "TSP" - Type, Significance, Pervasiveness - the same three lenses you'd use to size up any threat: what is it, how bad is it, and how far does it spread?

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