Question

Which is most likely when the assessed level of control risk increases?

A. Change from performing substantive procedures at year-end to an interim date.
B. Perform substantive procedures directed inside the entity rather than tests directed toward parties outside the entity. C. Use the maximum number of dual purpose tests.
D. Use larger sample sizes for substantive procedures

Answer 1

When control risk increases, auditors are likely to use larger sample sizes for substantive procedures (Option D) to compensate for the weaker reliance on internal controls and to obtain more audit evidence.

Step-by-step explanation:

When the assessed level of control risk increases, auditors consider the nature, timing, and extent of the auditing procedures to be used. Control risk is the risk that the entity's internal controls will not prevent or detect material misstatements. In such cases, auditors tend to rely less on the entity's controls and more on their substantive procedures.

Option D, 'Use larger sample sizes for substantive procedures', is the most likely approach when control risk is assessed to be higher. This is because an increase in control risk implies that the auditor cannot depend as much on the effectiveness of the entity's internal controls and therefore, should perform more extensive substantive procedures to obtain sufficient, appropriate audit evidence regarding the completeness, accuracy, and validity of the data and transactions under audit. The use of larger samples is consistent with the need to reduce detection risk, which is the risk that the procedures performed will not detect a misstatement that could be material, either individually or when aggregated with others.