Question

In this discussion, explain why inherent risk is set for audit objectives for segments (classes of transactions, balances, and presentation and disclosure) rather than for the overall audit.

What is the effect on the amount of evidence the auditor must accumulate when inherent risk changes from medium to high for an audit objective?

Provide examples to illustrate your answer.

Answer 1

Inherent risk- It is associated with the misleading information related to financial statements. It also arises when financial statements are complex. Inherent risk cannot be avoided.

Inherent risk is for the segments instead for the overall audit as misstatements occur in segments. By identifying the expectations of misstatement in the segments, the auditor is thus able to modify the evidence of audit by searching for the misstatement in the particular segments

When inherent risk changes from medium to high, auditor should increases the audit evidences of audit to determine whether the expected misstatement actually happened or not

Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of control. In a financial audit inherent risk is most likely to occur when transactions are complex or in situations that require a high degree of judgement in regards to financial estimates.

Inherent risk objectives are set for segments rather than the entire audit as a whole since auditing each segment is necessary.

The transaction has to carefully analyze so that each of them is accented according to the principles of them is a accented according to the principles of IFRS. The balances should be recalculated by the audit team so that there are no mistakes in the calculation done by the firm either knowingly or unknowingly.

The auditors must be External and independent and should not have any financial associations with the firm they are auditing for.

The significantly large amount of evidence has to collect when the risk of the firm changes from medium to high. A situation where the risk of a business changes is when the amount of debt increased and there is a possible risk of insolvency to the firm.

For example, if the level of debt in the firm was 60% and the firm was said to be in medium risk category. Now if the firm increases its debt exposure to 75% then the risk is classified as high since the ability of the firm to service the debt as and when it comes due becomes very difficult