The nature, timing and extent of substantive procedures is related to assessed level of control risk
The Correct Answer Is:
- c) directly
The nature, timing, and extent of substantive procedures are integral components of an auditor’s approach to auditing financial statements. These procedures are closely related to the assessed level of control risk within an organization.
The correct answer to the question is c) directly, meaning that the nature, timing, and extent of substantive procedures are directly related to the assessed level of control risk. Let’s delve into why this answer is correct and why the other options are not:
c) Directly – Correct Answer
The relationship between the nature, timing, and extent of substantive procedures and the assessed level of control risk is direct and interdependent. The control risk assessment made by an auditor has a significant impact on the substantive procedures they employ during the audit. Here’s a detailed explanation of this relationship:
Nature of Substantive Procedures:
The nature of substantive procedures refers to the type of audit testing methods and procedures used to detect material misstatements in the financial statements. When the assessed control risk is higher, meaning that internal controls are less effective, auditors may choose more extensive and detailed substantive procedures.
These may include more comprehensive testing of transactions, account balances, or specific audit procedures aimed at detecting errors or fraud. Conversely, if the assessed control risk is lower, auditors may rely more on controls and may perform fewer substantive procedures.
Timing of Substantive Procedures:
The timing of substantive procedures refers to when these procedures are executed during the audit. When control risk is assessed to be high, auditors are more likely to conduct substantive procedures at or near the end of the audit cycle.
This allows them to obtain more comprehensive and up-to-date evidence to detect any material misstatements that may have occurred due to weak or ineffective controls.
On the other hand, if control risk is low, auditors may choose to conduct substantive procedures at an earlier stage in the audit process to gather evidence and identify issues sooner.
Extent of Substantive Procedures:
The extent of substantive procedures relates to the depth and scope of audit testing. When control risk is assessed to be high, auditors will often expand the extent of substantive procedures to ensure a more thorough examination of financial statement accounts.
This may involve examining a larger sample size, conducting more detailed analytical procedures, or performing additional audit tests. In contrast, if control risk is low, auditors may reduce the extent of substantive procedures since they can have greater confidence in the effectiveness of internal controls.
In summary, the relationship between the nature, timing, and extent of substantive procedures and the assessed level of control risk is direct. A higher assessed control risk necessitates more extensive, detailed, and late-stage substantive procedures, while a lower assessed control risk allows for a greater reliance on internal controls and may involve less extensive substantive testing.
Now, let’s discuss why the other options are not correct:
a) Randomly – Not Correct
Substantive procedures are not applied randomly; they are based on a systematic and risk-based approach. Auditors do not randomly select procedures but rather design them in response to the assessed risks, including control risk. Auditors carefully plan and tailor substantive procedures to gather appropriate and sufficient audit evidence, considering the specific risks and controls in place.
b) Disproportionately – Not Correct
While the nature, timing, and extent of substantive procedures may vary based on the assessed control risk, they are not applied disproportionately. Auditors aim for a balanced approach, where the level of substantive testing is commensurate with the risks identified.
The goal is to gather enough evidence to provide reasonable assurance that the financial statements are free from material misstatements without over-auditing or under-auditing.
d) Inversely – Not Correct
The relationship between the nature, timing, and extent of substantive procedures and the assessed level of control risk is not inverse. In an inverse relationship, one variable would increase as the other decreases, and vice versa.
However, in auditing, as control risk increases (meaning controls are less effective), substantive procedures typically increase in terms of nature, timing, and extent. This ensures that auditors adequately address the higher risk associated with weak or ineffective internal controls.
In conclusion, the nature, timing, and extent of substantive procedures in auditing financial statements are directly related to the assessed level of control risk. Auditors tailor their substantive procedures to the specific control risk assessments, aiming to balance the need for sufficient audit evidence with the effectiveness of internal controls.
The other options, namely “randomly,” “disproportionately,” and “inversely,” do not accurately represent the systematic and risk-based approach that auditors employ when planning and executing substantive procedures during an audit.