D is corrent because a decrease in acceptable levels of materiality requires the auditor to do one or more of the following: (1) select a more effective auditing procedure, (2) perform auditing procedures closer to the balance sheet date, or (3) increase the extent of a particular auditing procedure. By increasing the extent of a procedure concerning an individual account and/or selecting a more effective procedure, the auditor will find the smaller misstatements that in aggregate might exceed his preliminary judgments about materiality. The auditor, therefore, must plan to find smaller misstatements as a lower acceptable level of materiality is established.
A is incorrect because lower levels of materiality do not require a reduction in the risk of assessing control risk too low. The risk of assessing control risk too low pertains to the planned reliance on specific internal control policies and procedures, not work on individual accounts.
B is incorrect because larger misstatements must be discovered in any sampling plan regardless of materiality levels.
C is incorrect because a decrease in materiality will lead to a decrease in tolerable misstatement for an account, not an increase. Tolerable misstatement is a planning concept and is related to the auditor’s preliminary estimates of materiality levels in such a way that tolerable misstatement combined for the entire audit plan, does not exceed those estimates.
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