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.

For 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.

1. Segregation of duties is inadequate.
2. Confirmation of receivables by an auditor fails to detect a material misstatement.
3. Cash payments have occurred without proper approval.
4. A client, Expo Ltd, has a large cash balance.
5. A necessary substantive audit procedure has been omitted.
6. Technological innovations within the industry have caused a major product to become obsolete.
7. A client, Rocket Ltd, has insufficient working capital to continue its operations.