ACCA Audit and Assurance (F8) Practice Exam

Which options are available to an auditor after risk assessment of internal controls?

1. Review past audit activities only

2. Substantive procedures only

3. Combination of tests of controls and substantive procedures

4. None of the above

The correct answer is: Combination of tests of controls and substantive procedures

After assessing the risks associated with internal controls, an auditor's approach to further testing is guided by the evaluation of how effective these controls are in mitigating identified risks. A combination of tests of controls and substantive procedures allows the auditor to obtain a well-rounded view of the control environment and the financial statements. Tests of controls are performed to evaluate the effectiveness of the internal controls that have been put in place. If the auditor determines that the internal controls are effective, there may be less need for extensive substantive procedures, allowing the auditor to rely on the controls to a certain extent. Conversely, if the controls are deemed ineffective, substantive procedures will be necessary to gather sufficient evidence about the accuracy and completeness of the financial statements. Substantive procedures involve the direct testing of account balances, transactions, and disclosures to ensure that the financial information is presented fairly. By combining these two approaches – testing of controls and substantive procedures – the auditor can achieve a more efficient audit, reduce overall audit risk, and tailor their work based on the effectiveness of the internal controls. Simply relying on past audit activities or only performing substantive procedures would not provide a comprehensive understanding of the current scenarios or potential risks. Therefore, using a combination of both tests of controls and substantive procedures is the most effective strategy