Through which risk assessment does noncompliance risk of material misstatement relate?

The noncompliance risk of material misstatement relates to both inherent and control risk. Inherent risk pertains to the susceptibility of an assertion to a material misstatement, assuming there are no related controls. This means that certain transactions or areas of the financial statements may have a higher likelihood of noncompliance due to the nature of the industry, regulations, or specific entity characteristics.

On the other hand, control risk refers to the risk that a material misstatement could occur and not be prevented or detected by the internal controls in place. If the internal controls regarding compliance with laws and regulations are weak or ineffective, this could elevate the control risk, further impacting the overall assessment of risk.

By recognizing that noncompliance risk can influence both the inherent risk — due to the nature of the compliance activities — and control risk — based on the effectiveness of internal controls designed to prevent or detect such noncompliance, it becomes clear why this answer incorporates both aspects. Each type of risk contributes to the auditor’s overall understanding of the risk of material misstatement in the financial statements, leading to a comprehensive evaluation during the audit process.