The auditors of Dunbar Electronics want to limit the risk of material misstatement in the valuation of inventories to 8 percent. They believe that there exists a 55 percent risk that a material misstatement could have bypassed the client's internal control and that the inherent risk of the account is 90 percent. They also believe that the analytical procedures performed to test the assertion have a 41 percent risk of failing to detect a material misstatement.
Required:
a. Briefly discuss what is meant by audit risk, inherent risk and control risk.
b. What level of detection risk is implicit in this problem?
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