Which one of the following discoveries by the auditor would NOT raise the red flag of increased inherent risk?
A) This is the fourth consecutive year that the firm has audited this client.
B) Client is a parent company with a subsidiary.
C) The client is an electronics manufacturer that is holding extensive inventory.
D) Review of the results of the previous year's audit shows there were significant misstatements in accounts payable.

Question

Quizplus · Accepted Answer

The fact that the firm has audited the client for four consecutive years does not necessarily increase the inherent risk. The longer the auditor has been working with the client, the more knowledge and understanding they have of the client's operations and internal controls, which may actually decrease inherent risk. The other options all represent potential red flags for increased inherent risk: a parent company and subsidiary relationship may introduce complexity and intercompany transactions that increase inherent risk, an electronics manufacturer holding extensive inventory may increase the risk of inventory valuation misstatements, and significant misstatements in accounts payable from the previous year's audit suggest the potential for misstatement in subsequent periods.

Which One of the Following Discoveries by the Auditor Would