Question

12. Which of the following statements are true in respect of detection risk? detection If inherent and control risk are assessed to be low then the auditor will need to lower the risk 1) If inherent and control risk are assessed to be low then the auditor will need to increase the size of samples when substantive testing A. 1 only B. 2 only C. Both of them D. Neither of them 2) Which of the following statements are true in respect of substantive procedures? 3) 4) 13. Auditors will note and aggregate errors discovered during the course of substantive testing. The level of substantive testing can be reduced if tests of controls show that controls are operating effectively A. 1 only B. 2 only C. Both of them D. Neither of them 14. You are a newly appointed audit firm and your client has asked you undertake some lucrative management consultancy work in addition to the annual audit. This situation is known as: A. A self-review threat B. An advocacy threat C. A self-interest threat D. An intimidation threat

Answer 1

12.Inherent Risk is the risk that there is a risk of misstatement.

Control Risk is the risk that internal control procedures will not be able to detect and correct material misstatements

Detection Risk is the risk that the auditor’s substantive procedures will not be able to detect errors

If the inherent risk and control risk is high, auditor needs to lower detection risk so that overall audit risk is low and vice versa

If inherent risk and control risk are low, sample size should be smaller since detection risk can be high

Hence, the answer is D. Neither of them

13.Substantive testing is done after test of controls. It is higher when controls are not working properly and vice-versa

Hence, the correct answer is C. Both of them

14.Since the auditor has created another interest in the company, that is, he may not get the consultancy work if he gives modified opinion in his report, it is known as Self interest threat

i.e. answer is C. A self-interest threat