Final answer:
Once auditors understand a client's internal control over cash, they assess the risk of material misstatement and design subsequent audit procedures, such as tests of controls and substantive procedures, to ensure the financial statements are accurate.
Step-by-step explanation:
Once auditors gain an understanding of the client's internal control over cash receipts and disbursements, they will assess the risk of material misstatement and design further audit procedures. This involves looking into the effectiveness of the company's internal controls and determining the nature, timing, and extent of additional audit activities. They aim to ensure that the financial statements are free from material misstatement, whether due to fraud or error.
Auditors will perform a mix of tests of controls and substantive procedures. Tests of controls are performed to evaluate the operating effectiveness of internal controls in preventing, or detecting and correcting, material misstatements. Substantive procedures, including substantive tests of transactions and substantive analytical procedures, are focused on detecting material misstatements at the assertion level.
In cases where the internal controls are assessed as strong, auditors may decide to rely on those controls and reduce substantive testing accordingly. Conversely, if they identify significant deficiencies or material weaknesses, they may increase the extent of substantive testing or alter the nature of the audit procedures. This approach allows auditors to provide reasonable assurance that the financial statements as a whole are free from material misstatement.