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Audit :Inherent risk

04 May 2010

Please explain the need to evaluate the inherent risk while designing the audit programme. Also if possible please provide a sitable example of the impact on financial statement.

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inherent risk is the susceptibility that the material misstatement may affect the class of transaction and account balance assuming that there were no internal control. The evaluation of inherent risk is necessary at the planning level for the audit procedures to be performed. For example if we have to take Rs. 100000 from 20 persons than we will evaluate the inherent risk if it is low than we check the 4 or 5 persons out of 20. but if the inherent risk is more than the auditor will likely to check more persons. Because if greater the inherent risk (low reliability on internal control) the greater the auditor will check the item (increase in sample size) or vice a versa.