ACCA Strategic Professional · Advanced Audit and Assurance (International) · Planning, materiality and assessing the risk of material misstatement
While assessing risk at Brightmoor Retail, the audit senior notes that the company's year-end inventory is held in 40 stores, valued using a complex formula with significant estimation, and management has a bonus tied to profit. Which assessment of risk components is most appropriate under ISA 315 (Revised 2019)?
Inherent risk should be placed towards the higher end of the spectrum for the valuation assertion. Complexity, estimation uncertainty and susceptibility to management bias from the profit-linked bonus are inherent risk factors in ISA 315 (Revised 2019). Control risk is assessed separately and is not automatically high.
- AInherent risk should be assessed on a spectrum, with the valuation assertion likely towards the higher end because of estimation uncertainty, complexity and potential management biasCorrect
- BInherent risk is low because inventory physically exists and can be counted
- CControl risk should be assessed as high automatically because a bonus exists
- DDetection risk should be set by management after the audit opinion is drafted
Explanation
ISA 315 (Revised 2019) requires inherent risk to be assessed considering the spectrum of inherent risk, influenced by factors such as complexity, subjectivity, uncertainty and susceptibility to management bias. Valuation of inventory with a complex formula and a profit-linked bonus points to higher inherent risk. Control risk is assessed separately based on the controls, not automatically from the bonus.
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