The auditor has determined that the perpetual inventory master files are high quality,assessing control risk related to physical observation of inventory as low.How does this affect audit testing? The auditor may
A)reduce the extent of control tests over data entry to the master file.
B)reduce the extent of the tests of physical inventory.
C)reduce the extent of control tests with respect to program change controls.
D)increase assessed inherent risks over the tests of physical inventory.

Question

Quizplus · Accepted Answer

Since the auditor has determined that the perpetual inventory master files are of high quality, control risk related to physical observation of inventory can be assessed as low. This means that there is less need to perform extensive tests of physical inventory, as the risk of material misstatement is low. However, this does not necessarily mean that control tests over data entry should be reduced, as data entry errors can still occur and affect inventory balances. Similarly, control tests with respect to program change controls should still be performed to ensure the integrity of the master files. Increasing assessed inherent risks over the tests of physical inventory would not be appropriate, as the risk of material misstatement is already low. Therefore, option B is the best choice.

The Auditor Has Determined That the Perpetual Inventory Master Files