Question

During the planning state of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result?

(1) The auditor may reduce the assessment of inherent risk to match the control risk, since they were assessed at the same level during the initial planning.
(2) The auditor may decrease the allowed level of detection risk.
(3) The auditor may rely solely on analytical procedures, with no substantive procedures performed.
(4) The auditor may reduce the amount of substantive procedures performed.

Answer 1

The reduction in control risk after additional testing of a client's internal controls is likely to lead the auditor to decrease the allowed level of detection risk, rather than reduce the inherent risk assessment or rely solely on analytical procedures. Consequently, the auditor may also reduce the amount of substantive procedures performed.

Step-by-step explanation:

During the planning stage of an audit, when an auditor reduces their assessment of control risk after further testing of the client's internal controls, it does not necessarily mean that the assessment of inherent risk will be reduced to match the control risk. Instead, it may affect the detection risk, which is the risk that the auditor will not detect a material misstatement that exists in an assertion. If the control risk is lower, the auditor may decide to accept a higher detection risk because the lowered control risk compensates for it. Therefore, the most likely outcome of reducing the control risk assessment is that the auditor will:

1. Not reduce the assessment of inherent risk solely based on the assessment of control risk.
2. Decrease the allowed level of detection risk, meaning that they can have a little more confidence in the effectiveness of controls and, as a result, require less evidence from substantive procedures to reach the same level of overall audit assurance.
3. Not rely solely on analytical procedures with no substantive procedures performed.
4. Reduce the amount of substantive procedures performed, because they can rely more on the effectiveness of the client's internal controls.