Consider the alternative audit planning strategies depicted in Figures 10-12 and 10-13 and answer each of the following questions.

a. Why would a strategy of performing moderate substantive tests of details not be acceptable, regardless of the outcome of substantive analytical procedures when the risk of material misstatements is set at a high level?

b. Why would an auditor only be required to perform moderate substantive tests of accounts when substantive analytical procedures do not result in finding outcomes that meet auditor expectations?

Figure 10-12

Figure 10-13

Transcribed Image Text:

Evaluate Risk of Material Misstatement based on strategic and process analysis and tests of internal control over financial reporting Conclusions about Residual Risks and Risks of Material Misstatement Risk of Material Misstatements set at High Level (or maximum) (Due to High Inherent Risk and/or High Control Risk because controls are missing or ineffective, and substantive tests alone can reduce audit risk to an appropriately low level) Risk of Material Misstatements set at Reduced Level (Due to Reduced Inherent Risk or Reduced Control Risk verified by basic procedures performed during process analysis including tests of controls over financial reporting) Risk of Material Misstatement set at Low Level (Due to Low Inherent Risk and Low Control Risk verified by process analysis and tests of controls over financial reporting) Substantive Analytical Substantive Analytical Substantive Analytical Procedures Procedures Procedures Not Not Not OK OK OK OK OK OK (1) (2) (3) (4) (5) (6) Very Extensive Extensive Extensive Testing Testing Testing Moderate Testing Moderate Minimal Testing Testing