Question

What are the major differences between a substantive strategy and a reliance strategy when the auditor considers internal control in planning an audit?

A) A substantive strategy involves testing controls, while a reliance strategy relies solely on substantive procedures.

B) A reliance strategy focuses on testing controls to reduce substantive procedures, while a substantive strategy relies solely on substantive procedures.

C) A substantive strategy emphasizes assessing control risk, while a reliance strategy emphasizes assessing inherent risk.

D) A reliance strategy and a substantive strategy are synonymous terms in audit planning.

Answer 1

The correct option is B. The major difference between a substantive strategy and a reliance strategy is that the former relies solely on substantive procedures, while the latter focuses on testing controls to potentially reduce substantive testing.

Step-by-step explanation:

When an auditor considers internal control in planning an audit, there are two primary approaches: the substantive strategy and the reliance strategy. The substantive strategy implies that the auditor plans to rely primarily on substantive procedures, conducting extensive tests of transactions and balances to detect material misstatements. In contrast, a reliance strategy focuses on gaining assurance from effective internal control systems, enabling the auditor to perform fewer substantive procedures.

To break it down further, when employing a reliance strategy, the auditor assesses and tests the operating effectiveness of the client's internal controls. If the controls are strong, the auditor may decide to rely on them, which could result in a reduced amount of substantive testing. On the other hand, in a substantive strategy, the auditor may decide that it is more efficient or necessary (due to weak controls or when it’s not cost-effective to test controls) to ignore the internal controls and focus directly on the numbers reported in the financial statements to confirm their accuracy.

So, the correct answer is B) A reliance strategy focuses on testing controls to reduce substantive procedures, while a substantive strategy relies solely on substantive procedures.