28. An auditor uses the assessed risks of material misstatement toA.Evaluate the effectiveness of the entity’s internal control.B.Identify transactions, account balances, and disclosures for which inherent risk is significant.C.Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.D.Determine the acceptable level of detection risk for financial statement assertions.Answer (D) is correct. For a given audit risk, the acceptable detection risk (the auditor’s risk) is inversely related to the assessed RMMs (the entity’s risks) at the assertion level. Detection risk is the risk that audit procedures will not detect a material misstatement. It relates to the nature, timing, and extent of procedures performed to reduce audit risk to an acceptably low level. Thus, it depends on the effectiveness of audit procedures and their application by the auditor (AU-C 330).
29. Which of the following is least likely to indicate the need to increase the assurance provided by substantive testing?Answer (D) is correct. Substantive procedures are performed to detect material misstatements in management’s assertions. The nature, timing, and extent of substantive procedures are determined by the acceptable level of audit risk. For a given audit risk, the acceptable detection risk is inversely related to the assessed risksof material misstatement. The assessed RMMs are combined assessments of control risk and inherent risk. Thus, a decrease in the assessed inherent risk (1) decreases the assessed RMMs for a given assessed control risk, (2) increases the acceptable detection risk, and (3) does not indicate a need for more persuasive audit evidence (AU-C-200).30. After obtaining an understanding of internal control in a financial statement audit, an auditor has concluded that it is well designed and is operating effectively. Under these circumstances, the auditor would most likelyAnswer (C) is correct. The auditor should obtain reasonable assurance about whether the financial statements are free from material misstatement to permit expression of an opinion on whether they are fairly presented. To obtain reasonable assurance, the auditor collects sufficient appropriate evidence to reduce audit risk toan acceptable level. For the given audit risk and the assessed inherent risk, a lower assessed control risk results in lower assessed risks of material misstatement and a higher acceptable detection risk. Detection risk relates to the nature, timing, and extent of audit procedures. For a higher acceptable detection risk, the less persuasive the audit evidence the auditor requires and the less need to increase the extent of substantive procedures (AU-C 200).
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- Winter '15
- Controls, substantive procedures