Pervasive Risk of Undetected Misstatements: Modifying Audit Strategy & Plan

When the risk of undetected misstatements is pervasive, it means that the risk exists across the financial statements and is not limited to specific accounts or transactions. This situation demands a more rigorous approach to the audit strategy and plan. Here's how you should modify them:

Instead of focusing on specific accounts (options A and C), the emphasis should be on enhancing the overall effectiveness of the audit procedures:

• D. Decrease performance materiality: Lowering performance materiality means setting a lower threshold for what is considered a material misstatement. This leads to a more detailed examination of transactions and balances, increasing the likelihood of detecting misstatements.

Why other options are not the primary response to pervasive risk:

• A. Modify substantive procedures over specific accounts: While modifying substantive procedures might be necessary for some accounts, it doesn't address the pervasive nature of the risk. * B. Increase the combined assessed risk for specific accounts: This contradicts the situation. Pervasive risk implies an already high assessed risk.* C. Perform substantive procedures over non-significant accounts: This approach might be inefficient and might not be the most effective use of audit resources when risk is pervasive.

In essence, when facing a pervasive risk of undetected misstatements, auditors need to cast a wider net by decreasing performance materiality. This allows for a more comprehensive examination and enhances the overall effectiveness of the audit in detecting potential material misstatements.