During the audit of Teddy Company, the external auditor, Spring, has noted from the planning session with the audit team that it is important to properly identify entity-level and transaction-level risks. However, as this is Spring's first audit engagement, Spring is having a difficult time making a distinction between the two, so he consulted with the audit manager for examples. Which of the following is the best response from the audit manager?
a. Entity-level and transaction-level risks differ in terms of the amount of the misstatement. Risks of large misstatements will be considered as entity-level risks while small amounts will be transaction level risks.
b. An entity-level risk is that which affects multiple accounts and assertions. An example is when a company is under pressure to maintain a certain return on assets ratio.
c. A transaction-level risk is that which affects limited accounts and assertions. An example is when a company has a target level of sales so the risk of misstatement might involve both the sales and receivables account.
d. An entity-level risk is that which affects multiple accounts and assertions. An example is when a company has a target level of sales so the risk of misstatement might involve both the sales and receivables accounts.