Question

When performing an Inherent risk assessment of a company and you need to make a comment about the 'going concern risk'. would you just analyze the financial statements? and how would you structure the comment?

Answer 1

Inherent risk, as applied to the practice of accounting, is the risk of wrong or misleading information appearing in financial statements that have occurred for reasons other than the failure of controls.These incidents often happen when complex financial instruments are being used, or when a company is releasing profit guidance for future quarters. Inherent risk can be looked at in conjunction with audit risk, which is the possibility of making mistakes while performing an audit.

In financial and managerial accounting, inherent risk is defined as the possibility of incorrect or misleading information in accounting statements resulting from something other than the failure of controls. Incidents of inherent risk are most common where accountants have to use a larger than normal amount of judgment and approximation, or where complex financial instruments are involved. It is often present when a company releases forward-looking financial statements.

Non-routine accounts or transactions can present some inherent risk. For example, accounting for fire damage or acquiring another company is uncommon enough that auditors run the risk of focusing too much or too little on the unique event.

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.