Question

If significant fraud risk exists, the auditors should _______.

1) respond by including elements of predictability in their audit plan
2) respond by including elements of unpredictability in their audit plan
3) plan to place greater reliance on the internal audit function
4) be able to place greater reliance on management assertions

Answer 1

When there is a significant fraud risk, auditors should respond by incorporating unpredictability into their audit plan. This approach minimizes the chances for fraud to go undetected. Reliance on management or internal audits should not increase when fraud risk is high.

Step-by-step explanation:

If significant fraud risk exists, the auditors should respond by including elements of unpredictability in their audit plan. This means that they should avoid creating patterns that could be anticipated by those committing fraud, thereby making it harder for fraudulent activities to remain undetected. Auditors may change the timing of their testing, the extent of the procedures they perform, or even the nature of the procedures to introduce this unpredictability.

On the other hand, placing greater reliance on the internal audit function or management assertions is not the appropriate response when there is a high risk of fraud. In such cases, auditors should aim to be even more independent and skeptical, not less, in order to effectively respond to the risk of material misstatement due to fraud.