Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

What is a potential outcome of poor control assessment based on audit sampling?

1. Underestimating fraud risk

2. Over-relying on management's assertions

3. Inaccurate financial forecasting

4. Inability to detect systematic errors

The correct answer is: Underestimating fraud risk

Underestimating fraud risk is a potential outcome of poor control assessment based on audit sampling because ineffective control assessments may lead auditors to inaccurately gauge the reliability of an organization's internal controls. When controls are assessed poorly, auditors might assume that the likelihood of fraud occurring is lower than it actually is. This can result in inadequate procedures being implemented to address or detect possible fraudulent activities. In an environment where internal controls are weak or not properly evaluated, the risk of fraud increases significantly. Auditors rely on their assessment to determine the extent of testing required in their procedures. If controls are underestimated, significant risks may go unaddressed, potentially allowing fraudulent transactions to occur without detection, ultimately impacting the integrity of the financial statements. Other outcomes such as over-relying on management's assertions, inaccurate financial forecasting, or inability to detect systematic errors may stem from poor control assessments but are more indirect consequences. The direct link between poor control assessment and the underestimation of fraud risk highlights the importance of thorough evaluations in the auditing process to ensure that all relevant risks are adequately addressed.