You generally consider your audit client's management to be honest.However,they do have a bias towards wanting to understate their income to lower income taxes.How would this bias be implemented in the audit risk model?
A)reduce acceptable audit risk and reduce inherent risk
B)increase acceptable audit risk and reduce inherent risk
C)reduce acceptable audit risk and increase inherent risk
D)increase acceptable audit risk and increase inherent risk

Question

Quizplus · Accepted Answer

The bias towards wanting to understate income to lower income taxes is a significant risk that can lead to material misstatements in the financial statements. Therefore, reducing the acceptable audit risk is appropriate. Additionally, the bias increases the likelihood of material misstatements, resulting in an increase in inherent risk. Therefore, inherent risk should be increased. Therefore, reducing acceptable audit risk and increasing inherent risk is the best option, which is only described in option C. The other options suggest increasing the acceptable audit risk, which is not appropriate given the potential risk of material misstatements.

You Generally Consider Your Audit Client's Management to Be Honest