Risk Impact: Overlooking Procedural Control Failure in Audit Reports

D.

The correct answer is C. Audit.

Explanation:

In this scenario, the audit manager discovers that evidence was overlooked during the audit, which indicates that a procedural control may have failed and could contradict a conclusion of the audit. This oversight affects the risk associated with the audit itself.

The audit risk is the risk that the auditor issues an incorrect opinion on the financial statements or fails to detect material misstatements. Audit risk is composed of three components: inherent risk, control risk, and detection risk. Inherent risk is the susceptibility of a financial statement assertion to a material misstatement, regardless of the client's internal controls. Control risk is the risk that a material misstatement could occur and not be prevented or detected by the client's internal controls. Detection risk is the risk that the auditor's procedures will not detect a material misstatement that exists.

In this scenario, the oversight of evidence indicates that the control risk may have been higher than anticipated, and there may have been a material misstatement that was not detected. This means that the detection risk was higher than expected, which increases the audit risk. The audit manager must address this oversight and determine the impact it has on the audit opinion.

In conclusion, the oversight of evidence affects the audit risk, which is composed of inherent risk, control risk, and detection risk. The audit risk is the risk that the auditor issues an incorrect opinion on the financial statements or fails to detect material misstatements. Therefore, the correct answer is C. Audit.