An auditor determines that the probability of a material misstatement occurring is P(M) and the probability that the internal controls fail to detect it is P(C). If the auditor's goal is to keep the total Audit Risk AR le 0.05, which analytical approach is required?

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SSC Audit Tax Finance P-II QUESTION #6211

Question 1

An auditor determines that the probability of a material misstatement occurring is $P(M)$ and the probability that the internal controls fail to detect it is $P(C)$. If the auditor's goal is to keep the total Audit Risk $AR \le 0.05$, which analytical approach is required?

Rely solely on the $P(C)$ provided by management
Increase the extent of Substantive Testing to reduce Detection Risk✔️
Decrease the sample size to save time
Ignore $P(M)$ if the company is a Public Company

Correct Answer Explanation

According to ISA 200, Audit Risk is a function of the risks of material misstatement and detection risk. If inherent and control risks are high, the auditor must reduce Detection Risk through increased substantive testing to maintain a low $AR$.

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