Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

Under which condition would an auditor most likely limit substantive tests of sales transactions?

1. Control risk is assessed as high

2. Control risk is assessed as low for the occurrence assertion

3. When evidence on inventory balances is unclear

4. When evidence of cash transactions is insufficient

The correct answer is: Control risk is assessed as low for the occurrence assertion

The choice indicating that control risk is assessed as low for the occurrence assertion is the most appropriate reason for an auditor to limit substantive tests of sales transactions. When control risk is assessed as low, it suggests that the internal controls in place are effective at preventing or detecting material misstatements related to sales transactions. This gives the auditor more confidence in the reliability of the internal controls, meaning they do not need to perform extensive substantive tests to verify the occurrence of sales. In this scenario, the auditor may rely on the effectiveness of the internal controls rather than the results from substantive testing. This reliance can streamline the audit process, as the auditor can focus on areas of higher risk that might significantly impact the financial statements. The other options would typically lead to a greater need for substantive testing rather than a limitation. For instance, a high control risk assessment indicates that the controls may not be effective, necessitating more substantive testing to gather evidence and address potential misstatements. Similarly, unclear inventory evidence or insufficient evidence on cash transactions would heighten risk factors, making it essential for the auditor to perform more substantive tests to mitigate those risks effectively.