How to Adjust Audit Strategy & Plan When Risk of Misstatement is Pervasive

When the risk of undetected misstatements is pervasive, meaning it could impact many areas of the financial statements, you need to adjust your overall audit strategy and plan. The most effective approach is to D. Decrease performance materiality. Here's why:

• Decreasing performance materiality means setting a lower threshold for what is considered 'material' to the financial statements. This leads to:
  • A need to gather more audit evidence.
  • Increased scrutiny of transactions and balances.
  • Potentially expanding the scope of audit procedures.

While the other options might seem relevant, they are not the most effective responses to pervasive risk:

• A. Modify substantive procedures over specific accounts. While adjusting substantive procedures is important, it alone won't address the pervasive nature of the risk. You need a broader approach.
• B. Increase the combined assessed risk for specific accounts. This is already implied by the pervasive risk assessment and doesn't directly guide the modification of the audit strategy and plan.
• C. Perform substantive procedures over non-significant accounts. This could be unnecessarily time-consuming and might not be the most efficient use of audit resources when risk is pervasive.

In summary, decreasing performance materiality is the most impactful modification to your audit approach when facing a pervasive risk of undetected misstatements.