After the auditor has set the achieved level of control risk and determined the risk of material misstatement for the payroll cycle, the auditor can adjust detection risk: Audit Risk = Inherent Risk x Control Risk × Detection Risk Detection risk is the risk that the auditor’s procedures will fail to detect material misstatements. The auditor can increase or decrease detection risk by changing the nature, timing, and extent of the substantive procedures to be performed. The purpose of the substantive procedures is to substantiate financial statement accounts and disclosures. The more substantive procedures an auditor performs, the better the auditor’s chances of detecting material misstatements. When it comes to substantive procedures for the payroll cycle, the auditor can: • Perform analytical procedures • Perform tests of details for payroll transactions • Perform tests of details for payroll-related account balances After the substantive procedures have all been performed, the auditor …
