Final answer:
In the context of auditing, small sample sizes can be acceptable when inherent and control risks are low and auditors are willing to accept a higher detection risk. Substantive tests' effectiveness isn't necessarily diminished by small sample sizes but is influenced by other risk assessments and audit strategies.
Step-by-step explanation:
When considering the impact of risk of material misstatement (RMM) on the level of substantive testing, it is important to understand the implications of small sample sizes. If the combined assessed level of inherent risk and control risk is low, this suggests that the chance of a material misstatement occurring due to these factors is considered to be minimal. Hence, auditors may decide that less evidence is needed and that smaller samples are acceptable.
An acceptable level of detection risk being high means that auditors are willing to tolerate a higher risk that the audit procedures might not detect a material misstatement. This can typically occur when the auditors have already acquired a high level of assurance from understanding the entity and its environment, including its internal control. Therefore, this does not necessarily mean that substantive tests are less effective but rather reflects a strategic choice based on the assessed levels of other risks.
Lastly, collecting evidence at year-end is a procedural choice that may be influenced by the nature of the balance or transaction being audited and the need for timeliness in the information. It does not inherently imply anything about the effectiveness of the substantive tests or the size of the samples needed.