Question

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:

1) Increase the assessed level of inherent risk
2) Increase the assessed level of control risk
3) Increase the assessed level of detection risk
4) Increase the sample size for substantive tests

Answer 1

2) Increase the assessed level of control risk.

If detection risk cannot be reduced solely by substantive tests of transactions in a highly automated environment, the auditor would most likely increase the assessed level of control risk.

Step-by-step explanation:

In an environment that is highly automated, if an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions, the auditor would most likely increase the assessed level of control risk. By increasing the assessed level of control risk, the auditor is acknowledging that there may be weaknesses in the client's internal control system that could result in material misstatements not being detected.

Increasing the assessed level of control risk would mean that the auditor would place less reliance on the client's internal controls and perform more substantive testing to obtain sufficient and appropriate audit evidence.

For example, the auditor may decide to increase the extent of testing of account balances or perform additional testing procedures to obtain more reliable evidence.