Question

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

The risk involved would change from account to account. For example, the inherent risk of cash is more high when compared to the inherent risk of fixed assets. That is why the inherent risk is set for audit objectives for segments rather than for the overall audit.

If the inherent risk changes from medium to high, the evidence the auditor must accumulate would increase as he need to work more on the evidence.

For eg., if there is defalcation of cash by an employee, the auditor would need to probe into the cash accounts more than he would do when the misappropriation is not found out.