Inherent risk assessment
An auditor uses professional judgment and available knowledge to assess inherent risk, where there’s no information then the risk is assessed as high.
This risk can be assessed at two levels:
1. At the financial statement level:
At this level one considers the following factors:
• Integrity and attitude of management. If questionable the accounts have a high risk of being manipulated
• Dominance of few personalities who are influential and are likely to have vested interest.
• Management experience and knowledge of the finance team. If the team is incompetent the accounts are likely to have material misstatement.
• If management is under pressure to perform. If the pressure is too high mangers may manipulate the accounts to show better results
2. At the individual account level:
At this level the auditor considers the following:
• Review the accounts that are likely to carry this risk for instance stocks, depreciation among others
• Accounts that require prior year adjustments
• Assets at the risk of being lost or stolen
• Unusual transactions especially at the end of the year
• Salaries of employees especially the finance team. If the team is paid below market rate the team could have low morale leading to misstatements in the accounts.
Inherent risks in an an audit may impair arrival of the correct audit opinion.