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

What is the primary concern of the auditor when evaluating internal controls?

1. Completeness of transactions.

2. Timeliness of reporting.

3. Reasonableness of estimates made by management.

4. Risk of material misstatement.

The correct answer is: Risk of material misstatement.

The primary concern of an auditor when evaluating internal controls is the risk of material misstatement. This involves assessing how well the internal controls are designed and operating to prevent or detect errors or fraud that could lead to significant inaccuracies in financial statements. Auditors focus on understanding the internal controls' effectiveness to manage risks that could affect the reliability of financial reporting. Evaluating internal controls means looking for potential weak points where material misstatements might originate. Strong internal controls should mitigate risks associated with reporting inaccuracies due to errors or fraud. Thus, identifying and assessing these risks is crucial for auditors to determine the level of substantive testing required during an audit. The other options, while relevant to the overall auditing process, do not capture the core objective of evaluating internal controls as directly as the risk of material misstatement. Completeness of transactions and timeliness of reporting relate more to the operational efficiency of financial processes, while reasonableness of estimates made by management deals with a specific aspect of accounting judgment rather than the broader framework of internal controls.