ACCA Audit and Assurance (F8) Practice Exam

Which of the following would identify a "Low Risk" client?

1. Poor performance

2. High turnover of auditors

3. Strong controls

4. Odd accounting practices

The correct answer is: Strong controls

A "Low Risk" client is typically characterized by strong internal controls. When an organization has effective internal controls in place, it indicates a robust framework for managing risks, preventing errors, and ensuring compliance with regulations. This strength serves as a foundation for the reliability of financial reporting, which in turn, lowers the potential for material misstatements and fraud. Auditors are likely to assign a lower risk assessment to a client with these robust controls because the likelihood of encountering significant misstatements is reduced. Consequently, the audit approach can be less intensive as the auditor may rely more on the controls rather than perform extensive substantive testing. In contrast, poor performance can point to various underlying issues that might increase audit risk, high turnover of auditors could hint at instability and issues within the client, and odd accounting practices raise red flags regarding the integrity of financial reporting. All these factors suggest higher risks that would necessitate a more thorough audit approach.