Question

If the risk of material misstatement is low, auditors should use the ______ approach.

1) substantive approach
2) fraud risk approach
3) detection approach
4) reliance on controls approach

Answer 1

If the risk of material misstatement is low, auditors will often use the reliance on controls approach, which entitles them to perform fewer substantive tests due to trust in the company's internal controls. Substantive testing, however, is still performed to ensure accuracy of financial statements.

Step-by-step explanation:

If the risk of material misstatement is low, auditors should use the reliance on controls approach. This approach means that the auditor has a high level of confidence in the effectiveness of the company's internal controls over financial reporting. As a result, the auditor may choose to perform fewer substantive tests on the financial statement line items, as they can rely on the controls to prevent or detect material misstatements. However, it's important to note that even when auditors use this approach, they still perform some substantive testing as part of their overall audit strategy to ensure the financial statements are free of material misstatements.