TUV & Co., Chartered Accountants, are appointed as statutory auditors of DEF Ltd. for the year ending on 31st March, 2026. During the audit of…
CA Intermediate · Auditing and Ethics · RTP · September 2026
TUV & Co., Chartered Accountants, are appointed as statutory auditors of DEF Ltd. for the year ending on 31st March, 2026. During the audit of trade receivables, the auditors assess a high risk of material misstatement due to weak internal controls and absence of effective testing of controls. As a result, the audit team decides to rely more on substantive procedures, particularly tests of details, to obtain sufficient appropriate audit evidence. While planning the audit sampling, a junior auditor raises a query regarding how the assessment of risk of material misstatement impacts the sample size. In the above context, explain how the assessment of risk of material misstatement influences the sample size for tests of details.
Suggested Answer and Working Notes:
The higher the auditor's assessment of the risk of material misstatement, the larger the sample size needs to be. The auditor's assessment of the risk of material misstatement is affected by inherent risk and control risk. For example, if the auditor does not perform tests of controls, the auditor's risk assessment cannot be reduced for the effective operation of internal controls with respect to the particular assertion. Therefore, in order to reduce audit risk to an acceptably low level, the auditor needs a low detection risk and will rely more on substantive procedures. The more audit evidence that is obtained from tests of details (that is, the lower the detection risk), the larger the sample size will need to be. Thus, we can say that there will be an increase in sample size in case of an increase in the auditor's assessment of the risk of material misstatement. As per given facts, since the risk of material misstatement is high, the auditor should increase the sample size for tests of details to obtain sufficient appropriate audit evidence and reduce audit risk to an acceptably low level.
Topics: Audit Evidence
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