Which of the following statements is correct?

Question

BlackTom AI · Accepted Answer

The question asks which statement is correct about the relationship between the auditor's risk of material misstatement and detection risk, in the context of auditing.
Option 1: 'There is an inverse relation between the auditor's assessed risk of material misstatement and detection risk.' This is the foundational concept of audit risk: as the assessed risk of material misstatement (RMM) increases, the detection risk must be reduced (via more or more effective substantive procedures) to achieve an overall acceptable audit risk. Hence, this statement is correct.
Option 2: 'There is no relation between the auditor's assessed risk of material misstatement and detection risk.' This is incorrect because, in audit theory, RMM and detection risk are interrelated through the audit risk model. They are not independent; changes in RMM influence how much detection risk the auditor can tolerate.
Option 3: 'If detection risk is low, only a small number of substantive procedures are necessary to reduce the detection risk.' This is misleading. Detection risk being low means that the procedures performed are sufficiently effective at detecting misstatements; it does not imply that only a small number of procedures are needed to achieve that outcome. Often achieving a low detection risk requires adequately designed, potentially extensive substantive procedures, not just a small number.
Option 4: 'If detection risk is high, significant substantive procedures are necessary to reduce detection risk.' While logically one might increase procedures to lower a high detection risk, the statement describes a reactive stance without tying it to the overarching relationship with RMM and the other elements of the audit risk model. In the context of choosing the single most fundamental correct statement about the relationship, this option focuses on procedural response rather than the core inverse relationship, and may be considered less precise as the primary correct statement for this question.
So, evaluating all options, Option 1 best captures the core principle that links RMM and detection risk in an inverse relationship, which is why it is identified as the correct statement in typical examination expectations.

22730 Auditing and Assurance Services - Spring 2025 Module Quiz 3: In-Class Quiz

Which of the following statements is correct?

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