An auditor must understand audit risk and its components when planning a financial report audit. The firm of Thomas & Fine evaluates the risk of material misstatement by disaggregating it into its three components: inherent risk, control risk and detection risk.RequiredFor each situation in the table below, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. SITUATIONCOMPONENT OF AUDIT RISK(a) Segregation of duties is inadequate. (b) Confirmation of receivables by an auditor fails to detect a material misstatement. (c) Cash payments have occurred without proper approval. (d) A client, Expo Ltd, has a large cash balance. (e) A necessary substantive audit procedure has been omitted. (f) Technological innovations within the industry have caused a major product to become obsolete. (g) A client, Rocket Ltd, has insufficient working capital to continue its operations.

(a) Segregation of duties is inadequate. Component of Audit Risk: Control Risk Justification: Control risk refers to the risk that a misstatement could occur in an assertion about a class of transaction, account balance, or disclosure and that the misstatement could be material when aggregated with misstatements in other assertions, and not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

(b) Confirmation of receivables by an auditor fails to detect a material misstatement. Component of Audit Risk: Detection Risk Justification: Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

(c) Cash payments have occurred without proper approval. Component of Audit Risk: Control Risk Justification: This situation indicates a failure in the entity's internal control system, which is a component of control risk.

(d) A client, Expo Ltd, has a large cash balance. Component of Audit Risk: Inherent Risk Justification: Inherent risk is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. A large cash balance could be inherently risky due to the potential for theft or misappropriation.

(e) A necessary substantive audit procedure has been omitted. Component of Audit Risk: Detection Risk Justification: This situation indicates a risk that the auditor's procedures will not detect a material misstatement, which is a component of detection risk.

(f) Technological innovations within the industry have caused a major product to become obsolete. Component of Audit Risk: Inherent Risk Justification: This situation indicates a risk inherent in the nature of the business or industry, which could lead to a material misstatement in the financial statements.

(g) A client, Rocket Ltd, has insufficient working capital to continue its operations. Component of Audit Risk: Inherent Risk Justification: This situation indicates a risk inherent in the financial stability of the client, which could lead to a material misstatement in the financial statements.