Question

An audit strategy is developed _______.

1) in response to the risk assessment for each significant account and assertion using the formula for audit risk
2) in response to the risk assessment for each insignificant account and assertion using the formula for audit risk
3) by the auditor, but must be reviewed and approved by management
4) by the auditor, but must be reviewed and approved by the internal audit function

Answer 1

An audit strategy is developed by an auditor in response to the risk assessment for each significant account and assertion using the formula for audit risk.

Step-by-step explanation:

An audit strategy is developed in response to the risk assessment for each significant account and assertion using the formula for audit risk. To clarify, the appropriate answer from the options provided is 1) in response to the risk assessment for each significant account and assertion using the formula for audit risk. An auditor evaluates the risks of material misstatement through understanding the entity and its environment, including the entity's internal control. This process helps the auditor to determine the nature, timing and extent of further audit procedures to be performed.

It is important to note that audit strategies are not developed for insignificant accounts and assertions, nor do they require approval by management or the internal audit function. The auditor independently develops the strategy, although it may be discussed with management or the internal audit function as part of the communication process.