Question

For each of the following independent statements, state whether you agree or disagree with the statement and fully explain your answer.
Required

1. Each of the following changes (considered individually, and holding other things constant) can be expected to decrease the level of detection risk associated with the auditor's substantive tests:

   • decreasing materiality

   • reducing the level of audit risk

2. Auditing standards require that if an auditor plans to assess control risk as high, internal controls must be of higher quality and the auditor must perform more extensive tests of such controls.

3. A company that has a high business risk would suggest that the auditor should reduce the level of audit risk to provide for greater assurance that the audited financial statements would not be materially misstated.

4. When the auditor assesses the risk of material misstatement as low, detection risk would be assessed as high.

Answer 1

A) Agree. The statement is correct i.e. changes considered individually and holding order things constant can be expected to decrease the level of detection risks associated with the auditors substantive test. It depends upon the auditor to keep other things constant for substantive test to detect the risk associated within the Enterprise. Keeping other things constant and making changes to an individual item can lead to non detection of errors/ frauds which may lead to financial loss.

B) Disagree. If the internal controls are of higher quality then auditor does not have to perform extensive test.

C) Agree. As a Company that has high business risk what are the auditor to reduce the level of audit risk so that traitor assurance can be obtained that audited financial statements are not materially misstated. If the financial statements are materially misstated for a business with high risk then the stakeholders, creditors, customers, financial institutions might step back from conducting any business affairs.

D) Agree. The statement is true as when the auditor assess the risk of material misstatement as low, detention risk would be assessed as high. The auditor has to apply more substantive procedures to detect mistatements so that the financial statements show true and fair view of the organisation.