AAA – L3 – SA – Q5.5 – The audit approach

Why use a business risk approach for auditing large companies?

Question

What is the main justification for the use of a business risk approach to an audit of large companies?

A A systems-based approach and a substantive testing approach are unlikely to detect material misstatements in the financial statements of large companies.

B This approach forces the auditors to understand the client’s business in depth.

C It is more effective than other approaches to audit in detecting deficiencies in internal control.

D Major audit problems in large companies are more likely to result from business-related problems than from deficiencies in internal control.

Answer

Explanation: The business risk approach is justified for large companies because major audit risks often stem from business-related issues (D), such as market or operational risks, rather than internal control deficiencies. While understanding the client’s business (B) is necessary, it is not the main justification. Options A and C overstate the limitations of other approaches and misalign with the primary focus of the business risk approach.

Tags: Business Risk Approach, Financial Statements, Internal controls, Large Companies
Level: Level 3

Topic: The audit approach

Uploader: Salamat Hamid