…..the audit risk,….. the materiality and ……the audit effort
|a) Lower, Higher, Lower|
b) Lower, Lower, Higher
c) Higher, Lower, Lower
d) Lower, Higher, Higher
The Correct Answer Is:
- a) Lower, Higher, Lower
The correct answer is a) Lower, Higher, Lower. This combination accurately reflects the relationship between audit risk, materiality, and audit effort. Here’s a detailed explanation of why this answer is correct, along with explanations for why the other options are not accurate:
a) Lower Audit Risk:
Lower audit risk means that the auditor aims to reduce the risk of issuing an incorrect audit opinion. To achieve lower audit risk, auditors perform more extensive and thorough audit procedures.
They gather more evidence, conduct in-depth testing, and pay closer attention to details. Lower audit risk implies that the auditor is highly confident in the accuracy of the financial statements, reducing the likelihood of failing to detect material misstatements.
Materiality is a threshold used in the audit process to determine what level of errors or misstatements in the financial statements would be considered material or significant. When materiality is set at a higher level, it means that the auditor is willing to accept a higher level of error or misstatement in the financial statements without it affecting the audit opinion.
This is usually done when the risk of misstatement is low, and the auditor believes that smaller errors would not change the overall assessment of the financial statements.
Lower Audit Effort:
When audit risk is lower and materiality is set at a higher level, auditors can reduce their audit effort, meaning that they do not need to perform as many audit procedures.
This is because the auditor is confident that the risk of material misstatement is low, and even if some misstatements exist, they would not be considered material. Therefore, the audit can be conducted more efficiently with fewer resources.
Now, let’s explore why the other options are not correct:
b) Lower, Lower, Higher:
In this combination, lower audit risk is paired with lower materiality. This is not a typical relationship in auditing. Lower audit risk usually corresponds to higher materiality because when the auditor wants to minimize the risk of issuing an incorrect opinion, they are willing to tolerate fewer material misstatements in the financial statements.
Additionally, it suggests higher audit effort because when audit risk is low, the auditor typically performs more extensive procedures to achieve that lower risk.
c) Higher, Lower, Lower:
This combination pairs higher audit risk with lower materiality and lower audit effort. Again, this is not a typical relationship in auditing. Higher audit risk is typically associated with a lower tolerance for material misstatements, which results in higher materiality.
When audit risk is high, auditors are less confident in the financial statements’ accuracy and therefore need to conduct more extensive procedures, leading to a higher audit effort.
d) Lower, Higher, Higher:
In this option, lower audit risk is paired with higher materiality and higher audit effort. While lower audit risk does correspond with higher materiality, it does not align with higher audit effort. When audit risk is lower, auditors generally reduce their audit effort because they are more confident in the financial statements’ accuracy, allowing for a more efficient audit.
In summary, the correct combination is a) Lower, Higher, Lower. This represents a typical relationship in auditing, where lower audit risk is associated with higher materiality and lower audit effort.
It signifies that the auditor is highly confident in the financial statements’ accuracy, allowing for more efficient audit procedures with reduced resources. The other options do not accurately reflect the usual relationships among audit risk, materiality, and audit effort in the audit process.