Week 3 - Potential Sources of Inherent Risk

Question 1

What are the first 3 potential sources of inherent risk?

Answer 1

• high level of cash handling - high risk of cash theft/fraud
• fast growth - large volume of transactions brings risk of misstatements to financial statements
• high dependency on IT systems - risk of inappropriate access or changes to data resulting in misstatement

Question 2

What are the second 3 potential sources of inherent risk?

Answer 2

• volatile market - may require accounting estimates where estimation is very subjective
• poor staff morale or high turnover - could lead to increased error/fraud
• distribution of key functions - may make pieces of financial information inconsistent

Question 3

What are the third 3 potential sources of inherent risk?

Answer 3

• high levels of credit income - volume of credit transactions brings additional risk
• high risk of virus attack - remote hacking and inappropriate or illegal use of internet leading to corrupted financial records
• high value items in financial statements requiring judgement, such as intangible assets and items needing an expert opinion - open to variation in value

Question 4

What are the final 3 potential sources of inherent risk?

Answer 4

• inventory which is high value, small/fragile and rapid obsolescent - may affect valuation of assets
• entrepreneurial culture of fast growth/high profits - put pressure on staff to bend accounting rules and regulations
• levels of bad debt - risk that bad debt provision is misstated