Question

The risk that material misstatement will not be prevented or detected on a timely basis by internal controls can be reduced to zero by having effective controls in place. True or false? Explain.

Answer 1

False, Because the Control risk can never be zero because internal controls can’t provide absolute assurance that all material misstatements will be prevented or detected.

Control Risk is the risk of a material misstatement in the financial statements arising due to absence or failure in the operation of relevant controls of the entity.

Organizations must have adequate internal controls in place to prevent and detect instances of fraud and error. Control risk is considered to be high where the audit entity does not have adequate internal controls to prevent and detect instances of fraud and error in the financial statements.

Assessment of control risk may be higher for example in case of a small sized entity in which segregation of duties is not well defined and the financial statements are prepared by individuals who do not have the necessary technical knowledge of accounting and finance.