Explain how decisions about when and how much substantive testing isperformed relate to the overall risk assessment for the item being tested

The decision about when and how much substantive testing is performed is directly related to the overall risk assessment for the item being tested. Here's how:

1. Risk Assessment: The first step in any audit process is to assess the risk associated with the item being tested. This involves understanding the nature of the item, its complexity, the likelihood of errors or fraud, and the potential impact of such errors or fraud on the financial statements.

2. Determining the Extent of Substantive Testing: Once the risk assessment is complete, the auditor will determine the extent of substantive testing needed. If the risk associated with an item is high, more substantive testing will be required. Conversely, if the risk is low, less substantive testing may be sufficient.

3. Timing of Substantive Testing: The timing of substantive testing is also influenced by the risk assessment. If an item is considered high risk, the auditor may decide to perform substantive testing earlier in the audit process. This allows any issues to be identified and addressed sooner. On the other hand, if an item is considered low risk, substantive testing may be performed later in the audit process.

4. Nature of Substantive Testing: The nature of substantive testing (i.e., the specific tests performed) is also determined based on the risk assessment. High-risk items may require more detailed and complex testing procedures, while low-risk items may be adequately addressed with simpler tests.

In summary, the risk assessment guides the auditor's decisions about the nature, timing, and extent of substantive testing. By aligning the substantive testing with the assessed risks, the auditor can more effectively and efficiently address the risks of material misstatement in the financial statements.