Which of the following statements correctly describes the relationship between 'Significant Risks' and internal control testing?

Answer options:

Controls over significant risks can be tested every third year (rotational testing).

If the auditor plans to rely on controls over a significant risk, those controls must be tested in the current period.

Significant risks must always be addressed by substantive procedures alone; control testing is not permitted.

Inquiry and observation are sufficient to test controls over significant risks.

How to approach this question

Recall the rule for Significant Risks + Control Reliance = Current Year Testing (No rotation).

Full Answer

B.If the auditor plans to rely on controls over a significant risk, those controls must be tested in the current period.✓ Correct

For significant risks, if the auditor plans to rely on the operating effectiveness of controls, the auditor must test those controls in the current period. Reliance on prior audit evidence (benchmarking/rotation) is not permitted for significant risks.

Common mistakes

Applying the 3-year rotation rule to significant risks.

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