Requirement a. Explain why Audit B represents the maximum amount of reliance that can be placed on internal control. Why can't all the audit assurance be obtained by tests of controls? Although a client may have very effective internal controls, the auditor cannot place complete reliance on them in evaluating whether the financial statements are fairly stated. This reflects the inherent limitations of internal control, and the need under auditing standards to perform certain tests of balances such as confirmation of receivables and observation of inventory. Requirement b. Explain why the auditor may not place the maximum extent of reliance on controls in Audit B and Audit C. The auditor may decide not to place the maximum reliance on internal control if it is not cost-beneficial. The auditor may decide that it is more cost-effective to reduce reliance on controls and perform more substantive tests. Requirement c. For each of the eight evidence decisions, indicate whether the evidence decision relates to each of the audits described above. Every evidence decision relates to at least one of the audits, and some may relate to two or all three audits. Evidence Decisions Audit evidence decisions relate to 1. The auditor decided it was possible to assess control risk below the maximum. Audits B and C 2. The auditor identified effective controls and also identified some deficiencies in controls. Audit C 3. The auditor performed extensive positive confirmations at the balance sheet date. Audit A 4. The auditor performed tests of controls. Audits B and C 5. The auditor performed extensive tests of controls and minimal substantive tests. Audit B 6. The auditor performed substantive tests. Audits A, B and C 7. This audit was likely the least expensive to conduct. Audit B 8. The auditor confirmed receivables at an interim date. Audits B and C