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

CA Tanvi is auditing Lotus Pharma Ltd. She plans procedures to reduce audit risk to an acceptably low level. She assesses that the risk of material misstatement is high for inventory. Which response is most appropriate under SA 200 and the audit risk model?

Tanvi should perform more extensive substantive procedures to lower detection risk. Audit risk depends on the risk of material misstatement and detection risk, so when assessed misstatement risk is high, detection risk must be reduced to keep overall audit risk acceptably low.

  1. AIncrease the extent of substantive procedures to lower detection riskCorrect
  2. BIncrease detection risk, since the risk of material misstatement is high
  3. CIgnore the assessment because audit risk cannot be controlled by the auditor
  4. DReduce materiality to zero so that all items are tested

Explanation

Audit risk is a function of the risk of material misstatement (inherent and control risk) and detection risk. When the assessed risk of material misstatement is high, the auditor must lower detection risk by performing more or better substantive procedures. Raising detection risk would increase audit risk. Materiality cannot practically be set to zero.

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