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CS Professional · Internal and Forensic Audit · Internal Audit Tools and Techniques

Internal auditor of Ganga Retail Ltd assesses inherent risk in refunds as high. Management's refund approval control is rated strong after testing. Which conclusion follows under a risk-based approach?

Residual risk falls because the strong refund control mitigates the high inherent risk, so the auditor may reduce substantive testing but not drop it. Inherent risk itself stays high; controls only lower the remaining exposure after mitigation.

  1. AResidual risk is reduced by the strong control, so substantive testing can be moderated, though not eliminatedCorrect
  2. BResidual risk equals inherent risk, so full testing is needed regardless of controls
  3. CInherent risk becomes low once controls are tested as strong
  4. DNo further work is required because controls are strong

Explanation

Residual risk is inherent risk after considering effective controls. Strong controls lower residual risk, allowing reduced testing, but some work remains. Inherent risk itself does not change, and ignoring controls or stopping work are both wrong.

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