Choice d is incorrect The auditor is required to prepare a written audit plan

Choice d is incorrect the auditor is required to

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Choice "d" is incorrect. The auditor is required to prepare a written audit plan. Choice "c" is incorrect. Audit documentation should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "b" is incorrect. Establishing an understanding with the client is required by GAAS, and an engagement letter is a presumptively mandatory requirement. If an auditor's risk assessment is based on the effective operation of controls, the auditor will likely: a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. b . Perform tests of details of transactions and account balances to identify potential errors and fraud. c. Identify specific internal controls that are likely to detect or prevent material misstatements. d . Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing. Explanation Choice "c" is correct. Assessing risk based on the effective operation of controls involves (1) identifying specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions, and (2) performing tests of such controls to evaluate their effectiveness. Choice "a" is incorrect. Analytical procedures are used for planning purposes, as substantive tests, or as a final overall review. They are not used to support a risk assessment based on the effective operation of controls. Choice "b" is incorrect. Tests of details of transactions and account balances to identify potential errors and fraud are substantive tests. They are not used to support a risk assessment based on the effective operation of controls.
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Choice "d" is incorrect. The auditor may not assess risk based on the effective operation of controls unless tests of controls are performed. However, if the audit effort required to perform tests of controls exceeds the potential reduction in substantive testing, tests of controls will not be performed because doing so would reduce audit efficiency. An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment? a. Obtain an understanding of the entity's accounting system and control environment. b . Evaluate the effectiveness of the internal controls with tests of controls. c. Perform tests of details of transactions to detect material misstatements in the financial statements. d . Consider whether control activities can have a pervasive effect on financial statement assertions. Explanation Choice "c" is correct. Tests of details of transactions are used to detect material misstatements in the financial statements after the auditor has assessed risk, not as part of making this assessment. Choice "b" is incorrect. Tests of controls are required to support the auditor's assumption that controls are operating effectively.
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