Auditors Follow a Four-Step Approach to Reduce Assessed Control Risk

question 6

Multiple Choice

Auditors follow a four-step approach to reduce assessed control risk.What is the order of these four steps?
1) Identify key controls that should reduce control risk for each transaction-related audit objective.
2) Apply the transaction-related objectives to the class of transactions being tested.
3) Develop appropriate tests of controls for all internal controls that are used to reduce the preliminary assessment of control risk below maximum (key controls) .
4) For potential types of misstatements related to each transaction-related audit objective, design appropriate substantive tests of transactions.

• A) 1, 2, 3, 4
• B) 4, 1, 2, 3
• C) 2, 1, 3, 4
• D) 1, 3, 2, 4

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Definitions:

Conservatism

An accounting principle that requires potential expenses and liabilities to be recognized immediately, while revenues are only recognized when they are assured.

Accounting Principle

A general rule or guideline that guides accounting practices, ensuring consistency, reliability, and transparency in financial reporting.

Cost Or Market

An accounting principle that states inventory should be recorded at either its historical cost or market value, whichever is lower.

Replacement Cost

The cost to replace an asset with another of similar quality and functionality at current market prices.