Inherent Risk

Inherent Risk * i/3 of audit risk model.. lesast amount of evidence awailable use professional judgement * not static, assessed at the planning stage mostly and audit too Major factors that an auditor should consider when assessing inherent risk 1) Nature of clients business – the more susceptible the client the greater the risk ( if the client is in a business with heavy changes in technology 2) Nature of data processing – the more poorly the IT system is made and managed the greated the inherent risk 3) complexity and Inattentive management 4) Management Integrity – lacking integrity is the many times the reason for lawsuits against auditors 5) Clients Motivations – have tha pervasive impact on the policy selection and accounting application. Such as the the earnings based bonuses, sell the business or go public, tax minimization schemes all examples that can lead to management bias and increase INHERENT RISK 6) Results of Prior audits higher inherent risk in last year audit may lead to higher inherent risk this year…bc management are slow to fix it. 7) New Engagements more risky bc auditors lack familiarity with the clients business 8) Related party Transactions 9) Non-routine transactions – bc client lacks the knowledge and experience to properly account for such transactions 10 ) High judgement accounting estimates * allowances, warranty. 10) Assets that are highly susceptible to misappropriation or theft * Cash, inventory

MANAGEMENT ASSERTIONS and OBJECTIVES Assertions * we need to form an opinion whether each number in the F/S is fairly presented * all the dollars are recorded in the right accounts * company owns the assets and obligated to pay the liabilities * MANAGEMENT IS ASSERTING THAT THESE ARE THE NUMBERS AND THE COMPANY DOESNOT HAVE ANYHTING HIDDEN

INVENTORY account *