Question

1. An auditor determines that the audit risk is low, the inherent risk is high and the client’s internal controls are not effective. Which of the following conclusions can be reached?

	A.	None of the options is correct.
	B.	Auditors need to perform tests of controls. If the client’s internal control is proven to be effective, reduce the extent of substantive tests.
	C.	Predominantly substantive strategy needs to be used.
	D.	Auditors can choose to use lower assessed control risk strategy.
	E.	Auditors have to test the client’s internal controls and perform extensive amount of substantive tests.

Answer 1

(Q) An auditor determines that the audit risk is low, the inherent risk is high and the client’s internal controls are not effective. Which of the following conclusions can be reached?

(Ans) Option :- (E) - Auditors have to test the client’s internal controls and perform extensive amount of substantive tests.

• When inherent risk and control risk is high, acceptable detection risk needs to below to reduce audit risk to an acceptably low level. Alternatively, if the account balance is more susceptible to misstatement, the auditor must apply more effective substantive testing procedures. In short, the higher the assessment of inherent and control risk,the more audit evidence the auditor should obtain from the performance of substantive procedures.