If tests of controls do not provide sufficient evidence to support a reduction in the risk of misstatement, the auditor should

If tests of controls do not provide sufficient evidence to support a reduction in the risk of misstatement, the auditor should

• A. Proceed with the planned reduction anyway
• B. Increase the assessed level of control risk
• C. Increase substantive testing
• D. Ignore prior results

Answer: (C)

When tests of controls don’t show that controls are operating effectively, you can’t rely on those controls to reduce audit risk. The auditor must keep control risk at a higher level and obtain additional evidence from substantive procedures. Increasing substantive testing provides direct evidence about the assertions in the financial statements (e.g., more detailed tests of transactions, balances, and disclosures) to compensate for the lack of reliance on controls. Proceeding with a planned reduction would be inappropriate because the evidence doesn’t support relying on controls. Increasing the assessed level of control risk is effectively a consequence of not relying on controls, but the actionable step to obtain adequate evidence is to perform more substantive testing. Ignoring prior results would ignore the evidence already gathered and is not acceptable.

When tests of controls don’t show that controls are operating effectively, you can’t rely on those controls to reduce audit risk. The auditor must keep control risk at a higher level and obtain additional evidence from substantive procedures. Increasing substantive testing provides direct evidence about the assertions in the financial statements (e.g., more detailed tests of transactions, balances, and disclosures) to compensate for the lack of reliance on controls.

Proceeding with a planned reduction would be inappropriate because the evidence doesn’t support relying on controls. Increasing the assessed level of control risk is effectively a consequence of not relying on controls, but the actionable step to obtain adequate evidence is to perform more substantive testing. Ignoring prior results would ignore the evidence already gathered and is not acceptable.