Auditors Are Required to Obtain a Sufficient Understanding of an Entity's

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The Answer is A.The audit team has two primary reasons for conducting an evaluation of an entity's internal control.First,Sarbanes-Oxley requires an audit of the effectiveness of internal control that is an integrated part of the financial statement audit for publicly traded companies.The second reason for evaluating an entity's internal control is to comply with the performance principle of GAAS: To assess the risk of material misstatement to give the auditors a basis for planning the audit and determining the nature,timing,and extent of audit procedures for the substantive audit plan.The audit team assesses control risk.
B.If auditors assess control risk as "maximum" or 100 percent (i.e.,poor control),they will tend to perform a great deal of substantive procedures with large sample sizes (extent),at or near the entity's fiscal year end (timing),using procedures designed to obtain high-quality external evidence (nature).On the other hand,if auditors assess control risk as "low," usually around 10 to 20 percent (i.e.,effective control),they can perform fewer substantive procedures with smaller sample sizes (extent),at an interim date before the entity's fiscal year end (timing),using a mixture of procedures designed to obtain high-quality external evidence and lower-quality internal evidence (nature).Of course,auditors may assess control risk between "low" and "maximum" (e.g.,"moderate," "high," or "slightly below maximum")and adjust the substantive procedures accordingly.
C.No.here may be occasions when the audit team chooses to test everything substantively rather than relying on internal controls to reduce substantive testing.For example,for fixed assets,there are usually a small number of very material transactions.Testing controls would not be efficient if the audit team is going to examine every transaction anyway.

Auditors Are Required to Obtain a Sufficient Understanding of an Entity's

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