Question

(a) Provide some examples of the types and sources of information auditors use to assess inherent risk. (b) Describe the major components for the control environment and how feature of each can contribute to a stronger control environment.

Answer 1

a) Inherent risk of financial statements is the risk that cannot be avoided and will exist irrespective of an high quality audit.

Some of the types and sources of information auditors use to assess inherent risk are:

1.Management reports in the financial statements

2. Use an expert opinion and judgement

3. Carefully evaluating high complex transactions and unusual accounting entries

4. Assets that have high susceptibility for loss such as cash

5. Examining the reliability of estimates used in the financial statements.

b) Major components of internal control are :

1. Existence - An internal control system must exist in every organization to prevent any complacent behavior.

2. Effectiveness - The system must be effective to prevent any financial risks and increase reliability of the system.

3. Continuity- The controls have to be applied throughout all periods and in every transaction.