Question

The audit strategy known as "reliance on controls approach" is:

1) appropriate when internal controls are minimal.
2) means the auditor will spend minimum effort testing the client's system of internal controls.
3) requires the auditor to conduct extensive control testing.
4) means the auditor will conduct extensive year-end account-balance testing.

Answer 1

The "reliance on controls approach" in auditing is suitable when a client’s internal controls are strong and involves extensive control testing by the auditor to verify their effectiveness.

Step-by-step explanation:

The audit strategy known as the "reliance on controls approach" is appropriate in situations where the auditor assesses that the client's internal control system is both effective and strong. When an auditor takes on this strategy, it means they are placing trust in the company's internal controls to prevent or detect material misstatements in the financial statements. Therefore, option 3) requires the auditor to conduct extensive control testing is the correct answer. The auditor will perform tests to ensure that these controls are operating effectively throughout the period under review. If the controls are reliable, the auditor can reduce the amount of substantive testing of transactions and account balances at the year-end, as they have the assurance that the controls are managing financial reporting risks effectively.