Question

Why are the long-lived assets and inventory assertions of existence said to have an inherent risk of material misstatement that is higher than that of the account payable? (10%)

Answer 1

To understand inherent risk, it helps to place it within the context of audit risk analysis.

Audit risk is the risk that the auditor gives an inappropriate audit opinion when the financial statement are materially misstated . Thus, it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment.  

It can be of three distinct types.

Control risk: Control risk occurs when a financial misstatement results from a lack of proper accounting controls in the firm.

Detection risk: It's also possible that auditors simply fail to detect an otherwise easy-to-notice material misstatement in the financial information of the entity . This is known as detection risk. Normally, detection risk is countered by increasing the number of sampled transactions during auditing

Inherent risk: Considered the most pernicious of the major audit risk components, inherent risk can't be easily avoided through increased auditor training or creating controls in the auditing process. Nevertheless, it is one of the risks auditors and analysts must look for when reviewing financial statements, along with control risk and detection risk.

Common Examples of Inherent Risk :

Technological developments might make a particular product obsolete. Factors in the entity and its environment may also influence the inherent risk related to a specific assertion.

Inherent risk are basically considered while designing tests of controls and substantive procedures. Category of auditor's assessment lower or higher , each category covers a range of degrees of inherent risk .

The reason why that the long lived asset inventory assertion of existence said to have an inherent risk of material misstatement that is higher than that of accounts payable since account payable can be externally confirmed by the creditor but any misstatement in asset or inventory which have occurred before the implementation of internal control is very difficult to detect .

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