Question

Performing an audit for a business in the retail industry.

1. what are the types of inherent risks would a business in this industry potentially face and,

2. what types of accounts and assertions would be affected and the reasons they would be affected.

Answer 1

Inherent risk is particularly prevalent for accounts that require a lot of guesstimates, approximations, or value judgments by management. Fair value accounting estimates are difficult to make, and the nature of the fair value process should be disclosed in accounting statements. Auditors may have to investigate and interview the firm's decision-makers about estimation techniques to reduce error. This type of risk is magnified whether it occurs rarely or for the first time.