Question

After obtaining an understanding of the company’s internal control system, an auditor may decide to set control risk at the maximum level (i.e. take a substantive approach) for some assertions because he

a. Believes the internal controls are unlikely to be effective.

b. Determines that the pertinent internal control components are not well documented.

c. Performs tests of controls to restrict detection risk to an acceptable level.

d. Identifies internal controls that are likely to prevent material misstatements.

Answer 1

Answer Choice: A Believes the internal controls are unlikely to be effective.

EXPLANATION : If AUDITOR DECIDE TO SET CONTROL RISK AT THE MAXIMUM LEVEL THEN HE/ SHE BELIEVES THE INTERNAL CONTROLS ARE UNLIKELY TO BE EFFECTIVE.

IN SUBSTANTIVE AUDIT APPROACH AUDITOR SEEKS TO VERIFY ALMOST EACH AND EVERY TRANSACTION ON HIS OWN WITHOUT RELYING ON THE INFORMATION PROVIDED BY THE MANAGEMENT I.E. ZERO RELIANCE IS PLACED ON THE INTERNAL CONTROL SYSTEM OF THE ENTITY AND ANY INFORMATION PRODUCED BY THAT SYSTEM. THUS AUDITOR WILL HAVE TO “VOUCH” FOR EVERYTHING BY CONDUCTING A DETAILED EXAMINATION OF FINANCIAL INFORMATION UNDERLYING FINANCIAL STATEMENTS