The risk of misstatement in the financial statements are tested by how strong internal controls does an entity has. If the internal controls are highly strict the risk of misstatements are low and if the internal controls are not strict but are loose then the risk of misstatements are high. The higher the misstatement the higher the number of entity’s units to be tested and on the other side, lower the misstatement risk, lower the number of entity’s units to be tested. To discuss: Decisions of locations or business units to test to be taken by management and the auditor.

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Chapter 7, Problem 7.4RQ

To determine

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The risk of misstatement in the financial statements are tested by how strong internal controls does an entity has. If the internal controls are highly strict the risk of misstatements are low and if the internal controls are not strict but are loose then the risk of misstatements are high. The higher the misstatement the higher the number of entity’s units to be tested and on the other side, lower the misstatement risk, lower the number of entity’s units to be tested.

To discuss: Decisions of locations or business units to test to be taken by management and the auditor.

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