Following are evidence decisions for the three audits described in Figure 1:Audit A Ineffe...

Following are evidence decisions for the three audits described in Figure 1:

Audit A Ineffective client internal controls

Audit B Very effective client internal controls

Audit C Somewhat effective client internal controls

Evidence Decisions

1. The auditor performed extensive positive confirmations at the balance sheet date.

2. The auditor performed extensive tests of controls and minimal substantive tests.

3. The auditor decided it was possible to assess control risk below the maximum.

4. The auditor performed substantive tests.

5. This audit was likely the least expensive to conduct.

6. The auditor confirmed receivables at an interim date.

7. The auditor identified effective controls and also identified some deficiencies in controls.

8. The auditor performed tests of controls.

Required

a. Explain why Audit B represents the maximum amount of reliance that can be placed on internal control. Why can’t all the audit assurance be obtained by tests of controls?

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b. Explain why the auditor may not place the maximum extent of reliance on controls in Audit B and Audit C.

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c. For each of the eight evidence decisions, indicate whether the evidence decision relates to each of the audits described above. Every evidence decision relates to at least one of the audits, and some may relate to two or all three audits.

FIGURE 1 Audit Assurance from Substantive Tests and Tests of Controls at Different Levels of Internal Control Effectiveness