Responding to Assessed Risks

Overall responses

Skepticism · experienced staff · supervision · unpredictability · more year-end work.

Higher risk →

• Nature: more reliable (external, physical).
• Timing: at or near year-end.
• Extent: larger samples.

Tests of controls

• Must test when relying on controls or when substantive alone can't work (automated, no paper trail).
• Inquiry alone never enough; use observation, inspection, reperformance.
• Interim test → consider the remaining period.
• Unchanged controls: test at least every third audit (some each year). Significant-risk controls: every year.

Substantive procedures

• Required for every relevant assertion of every material item — regardless of risk.
• Always: agree statements to records; examine material journal entries.
• Significant risk, substantive-only approach → include tests of details.
• Interim substantive tests → roll forward to year-end.

Dual-purpose test

One procedure, two objectives (control + misstatement).

Exam traps

• Relying on prior-year control tests is allowed only for unchanged controls that don't address a significant risk — and the auditor must confirm this year that they haven't changed.
• A deviation in a control test can't be dismissed as a one-off without understanding its cause.
• Observation only shows how a control operated at the moment observed, not at other times.