Question

If the client has well-designed, implemented, and documented controls over the preparation of accounting estimates, then an appropriate risk response would be _______.

1) to focus this audit time on another area, and conclude there is no material risk in this area
2) to test the operating effectiveness of the controls
3) to test the operating effectiveness of the assertions
4) to obtain written representation from management to this effect, which negates the need for any testing

Answer 1

The appropriate risk response for well-designed, implemented, and documented controls over accounting estimates is to test the operating effectiveness of the controls to ensure they are preventing or detecting and correcting material misstatements.

Step-by-step explanation:

If the client has well-designed, implemented, and documented controls over the preparation of accounting estimates, then an appropriate risk response would be to test the operating effectiveness of the controls. This involves evaluating whether the controls are operating as intended and are effective in preventing or detecting and correcting material misstatements in the financial statements. It is not sufficient to just focus audit time on another area or rely solely on written representation from management without testing, since these do not provide assurance about the actual effectiveness of the controls. Testing the operating effectiveness provides the auditor with evidence to support the assessment of the risks of material misstatement and inform the nature, timing, and extent of further audit procedures.