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 associated with the misleading information related to financial statements. It also arises when financial statements are complex. Inherent risk cannot be avoided.

Inherent risk is not related to overall audit process but few segments. Auditor can modify the audit evidences by identifying expectations of misleading statements.

When inherent risk changes from medium to high, auditor should increases the audit evidences and also analyze the fact whether the expected misleading statements and information occurred or not.