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

Inherent Risk- It is related to auditing. Inherent risk arises when there are errors in accounting. This risk occurs when transactions are complex. This risk also arises if there is any financial fraud and accounting for complex financial instruments. Mostly financial service sector is exposed to inherent risk.

Inherent risk plays an important role in auditing because it affects the financial records and reports, account balances and balance sheet do not match sometimes due to inherent risk so auditor has to keep this risk on the priority.

When inherent risk increases from low to high then auditor has to analyze the past records thoroughly and also the vouchers. He has to cross check the financial transactions. He has to collect the evidences for making the final audit report.