Question

Auditing.

Why does low transaction volume cause control risk to increase? I'm talking about transaction volume (quantity) here not the values of transactions. Please give me a correct answer...

Answer 1

Control risk.

This risk is caused by the failure of existing controls or the absence of controls, leading to incorrect financial statements. In other words It is the risk that a misstatement that could occur in an account balance or class of transactions and that could be material, individually or when aggregated with misstatements in other balances or classes, would not be prevented or detected and corrected on a timely basis by the accounting and internal control systems.

Why does low transaction volume cause control risk to increase?

Factors that affect the magnitude of the misstatement that might result from a deficiency or deficiencies in controls include, but are not limited to, the following -

• The financial statement amounts or total of transactions exposed to the deficiency; and
• The volume of activity in the account balance or class of transactions exposed to the deficiency that has occurred in the current period or that is expected in future periods.

In some circumstances, particularly in some audits of smaller and less complex companies, the auditor might choose not to assess control risk as low for purposes of the audit of the financial statements. In such circumstances, the auditor's tests of the operating effectiveness of controls would be performed principally for the purpose of supporting his or her opinion on whether the company's internal control over financial reporting is effective as of year-end. The results of the auditor's financial statement auditing procedures also should inform his or her risk assessments in determining the testing necessary to conclude on the effectiveness of a control