Question

If the auditor determines that internal controls are not functioning as designed, and a compensating control does not exist, the auditor will assess control risk and the risk of material misstatement (RMM) as_______.

1) high and set detection risk as low
2) low and set detection risk as low
3) high and set detection risk as high
4) low and set detection risk as high

Answer 1

When an auditor finds internal controls to be ineffective without compensating controls, they will assess control risk and RMM as high, and correspondingly set detection risk as low to intensify substantive testing.

Step-by-step explanation:

If the auditor determines that internal controls are not functioning as designed, and a compensating control does not exist, the auditor will assess control risk and the risk of material misstatement (RMM) as high. As a consequence, the auditor will set detection risk as low. This is because with a higher assessment of control risk and RMM, the auditor aims to reduce the detection risk to avoid missing any material misstatements. The auditor will thus perform more, or more detailed, substantive testing to compensate for the higher risk.