Acceptable Population Error

C

The answer to this question is A. Risk of material misstatement.

During an audit, the auditor examines a sample of a company's financial transactions to assess whether the financial statements accurately reflect the company's financial position. However, there is always some uncertainty in the auditor's conclusion, because they only look at a sample of the transactions and not every single one.

To address this uncertainty, the auditor sets a level of materiality, which represents the maximum amount by which the financial statements could be misstated without changing the overall conclusion. The auditor also sets a level of acceptable risk, which represents the maximum level of uncertainty they are willing to accept.

The maximum error in the population that the auditor is willing to accept is the level of acceptable risk. This means that the auditor is willing to accept a certain level of uncertainty in their conclusions, and they will not consider it necessary to perform additional procedures if the amount of misstatement falls within this level.

Detection risk, on the other hand, is the risk that the auditor will fail to detect a material misstatement in the financial statements. This is a risk that the auditor wants to minimize by designing effective audit procedures and selecting an appropriate sample size.

Therefore, the correct answer to this question is A. Risk of material misstatement.