Final answer:
The auditor may reduce control risk below maximum when they conclude that controls were operating effectively during the reporting period, based on evidence from control testing.
Step-by-step explanation:
The auditor may reduce control risk below maximum if the auditor evaluates the control and concludes it was operating effectively during the reporting period.
An auditor assesses control risk as part of an audit of financial statements. Control risk is the risk that a material misstatement will not be prevented or detected and corrected on a timely basis by an entity's internal control. If a control is not only existing and properly designed, but also was implemented and operated effectively throughout the period under audit, an auditor might decide to reduce the assessed level of control risk below the maximum.
This decision is based on the evidence collected during the control testing phase of the audit. The auditor performs various procedures to gather this evidence, which may include inquiry, observation, inspection of relevant documentation, and re-performance of a control. If these tests indicate that the controls are reliable, the auditor may conclude that control risk can be assessed lower than the maximum. This assessment impacts the nature, timing, and extent of substantive procedures the auditor performs subsequently.