Question

As the acceptable level of detection risk decreases, the assurance directly provided from:

1) substantive procedures should increase.
2) substantive procedures should decrease.
3) tests of controls should increase.
4) tests of controls should decrease.

Answer 1

As the level of detection risk decreases, the assurance from substantive procedures should increase to gain more evidence that financial statements are accurate, which could also affect the extent of tests of controls.

Step-by-step explanation:

When the acceptable level of detection risk decreases, it means that auditors need greater assurance that the financial statements are free from material misstatement. This assurance can be obtained by altering the nature, timing, and extent of auditing procedures. Specifically:

• Substantive procedures should increase because these are detailed tests of account balances and transactions that provide the evidence auditors need to assess whether financial statements are materially misstated.
• Tests of controls should also be affected as they are related to the auditor's assessment of the effectiveness of a company's internal controls. If the detection risk is lower, the auditor may need to increase their reliance on these controls, which may require performing more extensive tests of controls.