MCQ 1 — SA 315 A high-risk item is not automatically a Significant Risk During the audit planning of

MCQ 1 — SA 315

A high-risk item is not automatically a Significant Risk

During the audit planning of Apex Technologies Ltd., the auditor identifies a risk relating to revenue from a newly introduced product line.

The following circumstances exist:

The product involves a new and relatively complex pricing mechanism.
The accounting treatment requires some degree of management judgment.
The estimated likelihood of a material misstatement is assessed as high, while the possible magnitude of misstatement, if it occurs, is assessed as moderate.
The auditor has identified relevant controls, but has not yet tested their operating effectiveness.
After considering the combination of likelihood and magnitude, the auditor places the assessed inherent risk at the high end of the spectrum, but not close to the upper end.

The audit manager states:

“Because the inherent risk has been assessed as high, this risk should necessarily be classified as a significant risk under SA 315.”

Which ONE of the following is the most appropriate conclusion?

A. The classification is not necessarily justified because a significant risk is a risk assessed close to the upper end of the spectrum of inherent risk, or otherwise identified as requiring special consideration under the SAs; a merely high assessment does not, by itself, establish that classification.

B. The classification is justified because any risk assessed as high on the spectrum of inherent risk is necessarily a significant risk, irrespective of whether it is close to the upper end.

C. The classification is justified because the presence of complexity and management judgment requires the auditor to treat the related risk as significant before considering the effectiveness of controls.

D. The classification cannot be made at this stage because a significant-risk assessment is permitted only after the auditor has completed tests of operating effectiveness of the relevant controls.