Audit and Assurance Practice Exam

True or False: Auditors conduct fewer substantive tests in the acquisition and payment cycle for companies with effective internal controls.

1. True

2. False

3. Only in rare cases

4. Depends on other factors

The correct answer is: True

The statement is true. Auditors tend to conduct fewer substantive tests in the acquisition and payment cycle when they identify that a company has effective internal controls. This is based on the risk-based audit approach, where the reliability and effectiveness of internal controls are key factors in determining the level of substantive testing required. When internal controls are deemed strong, such as having properly designed and functioning processes for authorization, recording, and safeguarding assets, auditors can place greater reliance on those controls to mitigate the risk of misstatements. Consequently, this allows them to reduce the extent of substantive tests, as the controls provide sufficient assurance that the transactions in the acquisition and payment cycle are being processed accurately and in compliance with applicable regulations and internal policies. In contrast, when internal controls are found to be ineffective or unreliable, auditors are compelled to increase their substantive testing to obtain the necessary assurance about the financial statements. This approach optimizes the audit process by focusing resources on areas of higher risk, aligning with the principles of efficiency and effectiveness in conducting audits.