…
.A43 .A44 Inherent risk is influenced by inherent risk factors. higher for some
assertions and related classes of transactions, account balances, and disclosures than for
others. Depending on the degree to which the inherent risk factors affect the
susceptibility of an assertion to misstatement, the level of inherent risk varies on a scale
that is referred to as the spectrum of inherent risk. The auditor determines significant
classes of transactions, account balances, and disclosures, and their relevant
assertions, as part of the process of identifying and assessing the risks of material
misstatement. For example, it may be higher for complex calculations or for accounts
balances consisting of amounts derived from accounting estimates that are subject to
significant estimation uncertainty may be identified as significant account balances, and
the auditor’s assessment of inherent risk for the related risks at the assertion level may
be higher because of the high estimation uncertainty. External circumstances giving rise
to business risks may also influence inherent risk. For example, technological
developments might make a particular product obsolete, thereby causing inventory to be
more susceptible to overstatement. Factors in the entity and its environment that relate to
several or all of the classes of transactions, account balances, or disclosures may also
influence the inherent risk related to a specific assertion. Such factors may include, for
example, a lack of sufficient working capital to continue operations or a declining
industry characterized by a large number of business failures.
A44 .A45 Control risk is a function of the effectiveness of the design,
implementation, and maintenance of internal controls by management to address
identified risks that threaten the achievement of the entity’s objectives relevant to
preparation and fair presentation of the entity’s financial statements. However, internal
control, no matter how well designed and operated, can only reduce, but not eliminate,
risks of material misstatement in the financial statements, because of the inherent
limitations of internal controls. These include, for example, the possibility of human
errors or mistakes, or of controls being circumvented by collusion or inappropriate
management override. Accordingly, some control risk will always exist. GAAS provide
the conditions under which the auditor is required to, or may choose to, test the operating
effectiveness of controls in determining the nature, timing, and extent of substantive
procedures to be performed.
fn 15
fn 15
[Footnote omitted for purposes of this SAS.]
.A45 .A46 The assessment of the risks of material misstatement may be expressed in
quantitative terms or in nonquantitative terms. In any case, the need for the auditor to
make appropriate risk assessments is more important than the different approaches by
which they may be made. GAAS typically do not ordinarily refer to inherent risk and
control risk separately, but rather to a combined assessment of the risks of material
misstatement, rather than inherent risk and control risk separately. However, SAS No.
145section 540, Auditing Accounting Estimates and Related Disclosures,
16
requires a
separate assessment of inherent risk to be assessed separately and from control risk to
provide a basis for designing and performing audit procedures to respond to the assessed