Question

Which of the following statements regarding a substantive approach is correct?

1) If there is no internal control in place, auditors assess RMM as low since both inherent and control risk are low.
2) If RMM is low, the audit strategy will be to perform extensive detailed substantive procedures and place little or no reliance on the client's internal controls.
3) The process for a substantive approach begins very differently than a reliance on controls approach.
4) If there is an internal control in place, auditors may decide to test the effectiveness of the internal control.

Answer 1

The correct statement about a substantive approach in auditing is that auditors may test the effectiveness of internal control if it is in place. Other options contain misunderstandings about how the level of internal control influences the auditors' assessment of risk and their testing approach.

Step-by-step explanation:

The correct statement regarding a substantive approach in auditing is 4) If there is an internal control in place, auditors may decide to test the effectiveness of the internal control. In auditing, the Risk of Material Misstatement (RMM) involves assessing both the inherent and control risks. A substantive approach often involves a high level of detailed testing of account balances and transactions when the auditor has determined that internal controls are weak and cannot be relied upon, contrary to what is suggested in statement 2). Statement 3) is incorrect as both approaches start similarly, with planning and risk assessment. In contrast, statement 1) is incorrect because a lack of internal control would typically increase the assessed RMM, not lower it.