In relation to control risk, what happens if controls are found to be effective?

When controls are found to be effective, the extent of substantive procedures may be reduced as a result. This is because effective internal controls provide reasonable assurance that transactions are processed accurately and that financial reporting is reliable. When auditors assess that control risk is lower due to effective controls, they can rely more on those controls and utilize a less extensive level of substantive testing, which includes detailed tests of transactions and balances.

This approach is grounded in the risk assessment process outlined in auditing standards, where the effectiveness of internal controls influences the nature, timing, and extent of substantive procedures required. Consequently, the auditor can focus resources more efficiently, relying on internal controls to detect or prevent material misstatements instead of conducting extensive additional testing.

The other choices imply misunderstandings about the relationship between control risk and substantive procedures. For instance, stating that all control risks are nullified misunderstands the inherent nature of risk in auditing; there is always some level of risk, even with effective controls. Additionally, saying that substantive procedures are unnecessary disregards the fact that some level of testing is usually still required, regardless of control effectiveness. Lastly, an increase in control risk would not be accurate if controls are assessed as effective.