What is likely when an auditor decides to perform tests of controls?

When an auditor decides to perform tests of controls, it indicates that a reliance on the effectiveness of those controls exists within the audit strategy. This approach generally indicates that substantive testing alone would not be sufficient to adequately manage and reduce audit risks to an acceptable level. By testing controls, the auditor aims to evaluate whether those controls can be relied upon to prevent or detect material misstatements.

Choosing to perform tests of controls suggests that the auditor believes certain controls are effective enough that they can be leveraged to reduce the amount of substantive testing required. This is particularly pertinent in environments where internal controls are expected to be effective and where the inherent risk associated with the process is not excessively high. Therefore, the auditor's decision signifies that a combination of both control tests and substantive testing is necessary to effectively mitigate risks.

The other options hint at misconceptions about the auditor's approach. For instance, having complete confidence in controls is generally not the case; instead, controls must be tested to determine their effectiveness. Additionally, prior control knowledge is vital in shaping the auditor's procedures and understanding the environment. Lastly, concluding that controls are entirely ineffective would negate the rationale for conducting tests of those controls in the first place.