Question

1.your client does not offer warranties on their products and has experienced very high levels of...

1.your client does not offer warranties on their products and has experienced very high levels of product returns over the past three years.

What would be the possible effect to the auditor’s risk assessment based on the scenario described above?

A. Increase inherent risk. B. Decrease inherent risk. C. Decrease control risk. D. Increase control risk.

2.The financial statements of your client contain several accounting estimates that are based on management assumptions.

What would be the possible effect to the auditor’s risk assessment based on the scenario described above?

A. Increase inherent risk. B. Decrease inherent risk. C. Decrease control risk. D. Increase control risk.

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Answer #1

Part 1) OPTION D------Increase Control Risk

Control Risk arises since company do not have proper internal controls to mitigate the risk. In given scenario, internal controls malfunctioned, therefore client experiences high levels of product returns over the past three years and does not offer warranties on their products.

Part 2) OPTION A-----Inherent Risk

Inherent risk arises when more of judgement and opinions are placed in regard to financial estimates.In given scenario, financial statements of clients contain several accounting estimates that are based on management assumptions hence which poses to more of inherent risk.

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