What is the effect on substantive tests of accounts receivab

What is the effect on substantive tests of accounts receivable when the risk of material misstatement is assessed as low rather than high because a client has effective internal controls? Provide specific examples

Solution

Hey,

When the client has strong internal control which means the risk of material misstatement is low, so the auditor can afford to have Low detection risk, which means auditor will do less substantive testing.

Internal controls and substantive testing can be said to have an inverse relationship, when internal controls are weak more substantive testing is to be done and vice versa.

Risk related to assets is that management tries to overstate the assets balance to give a rosy picture of the financial statement. so in our case Management can try to overstate accounts receivable by showing incorrect sales. if the entity has strong internal control auditor is assured that fake sales entry will be prevented by the system and auditor needs to do less work he can just obtain confirmation from few Debtors.