• Explanation

Control riskThe risk that a company's internal controls will neither prevent nor detect material misstatements. (CR) is the risk that internal control Procedures put in place to ensure the integrity of financial information and to prevent or detect and correct fraud or errors. will fail to prevent a material misstatement.  Along with inherent riskThe risk of a material misstatement due to factors other than control risk, including the business environment of the entity and the complexity of transactions., CR determines the risk that a material misstatement exists in the financial statements.  The higher the risk of material misstatement (RMM) The risk that an entity's financial statements contain one or more material misstatements. It is the product of inherent risk and control risk., the less risk auditors are willing to take that the audit will fail to identify a material misstatement (ie, detection riskThe risk that the auditor will fail to detect material errors or misstatements.).  Detection risk can be lowered by the application of additional substantive procedures Procedures used to detect material misstatements due to error or fraud in an entity's financial statements..

(Choice A)  An auditor evaluates the effectiveness of an entity's internal control to assess CR, not the other way around.

(Choice B)  Inherent risk is the RMM due to factors other than internal control (eg, complexity of transactions).  It does not affect, and is not affected by, the assessed level of CR.

(Choice C)  If RMM is high, the auditor may design procedures to detect smaller individual misstatements (ie, lower tolerable misstatement The amount by which the projection of a sample can differ from the recorded amount while still providing assurance that the financial statements as a whole are not materially misstated. ), thereby reducing the risk that the combined effect of individual misstatements is material. MaterialityAn amount that, if omitted from or misstated on a financial statement, can affect the financial decisions of those who use the statement. thresholds are based on the type or amount of misstatement that might influence the decisions made by users of the financial statements.  Materiality is not affected by RMM.

Things to remember:
The risk of material misstatement (RMM) is a function of control risk and inherent risk.  As RMM increases, the acceptable level of detection risk is decreased.  As RMM decreases, the acceptable level of detection risk is increased.