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explain why is it necessary for the auditor to understand an entity’s internal control system when assessing risk ? 5 marks
1. strength of the IC determines the level of control risk and a strong or a weak IC will determine the extent of Tests of control and Substantive tests
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5since the question is 5 marks, sadly i cd only come up with one point.
if i cd have simple points, i can expand them myself
thanks!!!
I would start by saying that audit risk is:
Inherent risk x control risk x detection risk.
The amount of work needed to achieve and acceptable audit risk for a client therefore depends on the control risk.
If the IC is poor, control risk is high and more audit work is needed, particularly substantive tests because there are few controls to subject to tests of controls.
If the IC is good, control risk is low and less audit work is needed. Additionally, most of that audit work will focus on testing the controls to ensure that they can be relied upon.
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