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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

CA Deepak is the auditor of Himalaya Foods Ltd. He plans an audit in which the risk of material misstatement is assessed as high. He wishes to keep overall audit risk at an acceptably low level. Under SA 200, which response is correct?

The auditor should reduce detection risk by performing more extensive or more effective audit procedures. Audit risk is the product of the risk of material misstatement and detection risk, so when the former is high, the latter must be lowered to keep overall audit risk acceptably low.

  1. AAccept a higher detection risk, so that less substantive testing is required
  2. BReduce detection risk by performing more extensive or more effective audit proceduresCorrect
  3. CReduce inherent risk by strengthening the client's internal control through his own actions
  4. DIgnore the assessment, since audit risk is determined only by sampling risk

Explanation

Audit risk = risk of material misstatement x detection risk. When the assessed risk of material misstatement is high, the auditor must lower detection risk by doing more or better procedures. Accepting higher detection risk would raise audit risk. The auditor cannot change the client's inherent or control risk by his own actions.

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