Which of the following statements regarding inherent risk is correct?
A) Inherent risk is unaffected by the auditor's experience with client's organization.
B) Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect.
C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.
D) Inherent risk is dependent upon the strengths in client's internal control system.

Question

Quizplus · Accepted Answer

Inherent risk is the susceptibility of an assertion about a transaction or account balance to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Auditors often start with a conservative approach by setting a high inherent risk in the initial year of auditing a new client due to limited knowledge about the company's operations and internal controls. As auditors gain more experience and understanding of the company's processes and controls in subsequent years, they may adjust the inherent risk assessment accordingly.

Which of the Following Statements Regarding Inherent Risk Is Correct