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CS Professional · Compliance Management, Audit and Due Diligence · Audit Principles and Techniques

Auditor Meera plans the audit of Gokul Steel Ltd. She decides to spend most of her testing effort on revenue recognition and inventory valuation, where fraud or error risks are highest, and less effort on low-risk areas such as petty stationery expenses. Which statement best reflects the SA 200 approach that supports her decision?

Meera's approach matches SA 200, which requires the auditor to plan effectively and direct audit effort to areas most expected to contain risks of material misstatement, whether from fraud or error, with correspondingly less effort in other areas. Equal effort everywhere or following management requests is not the standard.

  1. AThe auditor should plan effectively and direct audit effort to areas most expected to contain risks of material misstatement, with correspondingly less effort elsewhereCorrect
  2. BThe auditor must apply equal testing effort to every account balance to ensure uniformity
  3. CThe auditor should direct effort mainly to areas where management has asked for assurance
  4. DThe auditor should reduce effort in areas of fraud risk because fraud is the responsibility of management only

Explanation

SA 200 says the auditor needs to plan the audit to be effective, direct audit effort to areas most expected to contain risks of material misstatement, whether due to fraud or error, with less effort at other areas, and use testing and other means of examining populations. Equal effort across all areas contradicts this, and fraud risk areas call for more, not less, effort.

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