The auditor has assessed inherent risk and control risk as low. What is the most appropriate outcome?

Question

BlackTom AI · Accepted Answer

When considering the outcome after assessing inherent risk as low and control risk as low, we look at the implications for audit strategy and substantive procedures.
Option 1: 'Adjust audit risk to low' — While a low inherent and control risk profile supports a lower overall audit risk, auditors typically set an acceptable level of audit risk as part of planning (often reflecting professional judgment and regulatory expectations) rather than directly instructing a unilateral adjustment to 'audit risk' as a decision outcome. This statement is conceptually vague and does not describe how the testing approach or procedures should be modified.
Option 2: 'Increase reliance on substantive tests of transactions and account balances' — With lower inherent and control risks, you would not typically increase substantive testing. In fact, you would usually decrease substantive procedures because detection risk can be allowed to remain higher while still achieving the desired overall audit risk. Increasing substantive tests would be more appropriate when risk is higher, not when it is low.
Option 3: 'Reduce reliance on substantive tests of transactions and account balances' — This aligns with the audit risk model: low inherent risk and strong controls reduce the likelihood of material misstatement going undetected, allowing the auditor to rely more on the entity's controls and, consequently, perform fewer substantive procedures. By reducing substantive testing, detection risk can be raised to achieve the overall desired audit risk, given the favorable risk profile.
Option 4: 'Adjust audit risk to high' — This is inconsistent with the assessment of low inherent and control risk. If risks are assessed as low, increasing the planned audit risk (i.e., accepting a higher risk of issuing an incorrect opinion) would counter the basis of the assessment and undermine the planning logic. This option conflicts with the premise of low risk.
In summary, options that advocate more substantive testing or raising audit risk contradict the logical implications of low inherent and control risk. The reasoning for reducing substantive tests is consistent with the objective of achieving the desired, appropriately low overall audit risk while taking advantage of the effective controls and low inherent risk in the engagement.

22730 Auditing and Assurance Services - Spring 2025 Module Quiz 2: In-Class Quiz

The auditor has assessed inherent risk and control risk as low. What is the most appropriate outcome?

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