Australian Defence Force (ADF) Interview Practice

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A retailer has rapidly opened 30 new stores, changed its inventory system near year end, and tied senior management bonuses to reported profit. Which response best reflects the auditor's risk assessment?

Reduce substantive testing because growth indicates strong controls Treat the circumstances as increasing risks of material misstatement and design further procedures responsive to those risks Conclude that detection risk is automatically zero because the inventory system is new Ignore the bonus arrangement because remuneration does not affect financial reporting risk

Correct Answer:

Treat the circumstances as increasing risks of material misstatement and design further procedures responsive to those risks

Explanation:

Rapid expansion, a major systems change and profit-linked bonuses can increase inherent and fraud-related risks of material misstatement. The auditor should assess those risks and design appropriate further audit procedures; detection risk is managed by the auditor and is never automatically zero.

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