I recently found this blog post on IIA website about risk appetite, you can refer to it here http://normanmarks.wordpress.com/2013/09/23/what-is-your-risk-appetite/. The author of the blog has explained risk appetite quite well using driving a car as an example.
I feel risk appetite is an important concept that is not always utilised because it is diffcult to explain and put in monetory terms. I have rarely found someone using this concept when discussing audit issues or defining materiality levels for testing.
But if you really look at it, the risk appetite is actually the materiality that a business sets in place, its the amount of loss they are willing to take when doing business and if as an auditor you understand what that is you can ensure the focus of audit is at a level that is material to the business and they will take the audit findings in a more positive way.
The problem comes when everyone applies their own interpretation of the risk appetite, typically the business will they have a higher level of appetite and internal auditor will come with a more conservative view.
I think if we go back and discuss with the business on how the corporate risk appetite fits that business during the planning phase of the audit it can reduce the heartburn and issue discussions during the audit (in most cases, as you will always find people who will not accept any audit issues ;-).