Question

When detection risk is low, the auditor is likely to?

1) prepare the bank reconciliation using bank data in the client's possession or audit the bank reconciliation using a cutoff bank statement obtained from the bank.
2) scan bank reconciliations and test items on bank reconciliations on a sample basis.
3) test the client's internal controls over the preparation of bank reconciliations.
4) confirm bank balances with the Federal Deposit Insurance Corporation.

Answer 1

When detection risk is low, an auditor usually scans bank reconciliations and tests items on a sample basis, signifying confidence in the company's internal financial controls and the accuracy of their financial statements.

Step-by-step explanation:

When detection risk is low, an auditor is likely to scan bank reconciliations and test items on bank reconciliations on a sample basis. Detection risk is the risk that the auditor will not detect a material misstatement in the financial statements. If this risk is low, it indicates that the auditor has confidence in the client's internal controls and the accuracy of their financial statements. Therefore, the auditor might employ less rigorous substantive testing because the risk of finding material misstatements is deemed to be lower. This approach is more efficient and cost-effective compared to full-scale testing of all transactions.

Bank reconciliations are an important control mechanism that ensures the amounts on a company's books match the actual cash amounts in its bank accounts. A lower detection risk would mean that the auditor might not need to perform full reconciliation themselves or confirm bank balances directly with external parties, such as the Federal Deposit Insurance Corporation, as they would consider existing client controls to be reliable.