Q. 13 of 3rd chapter of CA final audit pm…. Question is on evaluation of inherent risk… As per PM analysis sheet. Answer is on page 88 of book… But we didn’t find any answer related to this…. Plz explain…
Agree this answer is weird, it is not exactly as per SA
i have simplified flow of answer please try to retain it in following key points, if any point is not clear ask further doubt 🙂
Question 13 Write a short note on Factors relevant in evaluation of Inherent Risk.
Answer Relevant Factors in evaluation of inherent risk: (Assess Financial Statement Level Account Balance Level) While developing an overall audit plan, the auditor is required to assess inherent risk at financial statement level and is then required to relate his assessment to material account balances and the class of transactions. (Source of information) To assess inherent risk, the auditor would use professional judgement to evaluate numerous factors, having regard to his experience of the entity from previous audit engagements of the entity, any controls established by management to compensate for a high level of inherent risk, and his knowledge of any significant changes which might have taken place since his last assessment.
(Factors leading to financial statement inherent risk)
Normally an auditor evaluates inherent risk by assessing factors such as integrity of the management, experience and knowledge of the management, turnover of key management personnel, circumstances which may motivate the management to misstate the financial statement when its financial performance is not satisfactory, nature of entity’s business prone to rapid technological obsolescence dealing with large number of related parties, etc.