Final answer:
The client's decision to repair the laptops versus replacing them is not an inherent risk to consider when evaluating inherent risk for a client who sells laptops with faulty screen controls. The correct answer is 2) the client's decision to repair the laptops vs. replacing them.
Step-by-step explanation:
When evaluating inherent risk for a client who sells laptops that have experienced returns for faulty screen controls, we consider factors that could potentially increase the likelihood of material misstatements in the entity's financial statements. Three inherent risks to consider are:
- The likelihood other laptops will be returned for the same reason, indicating a potential widespread issue with product quality.
- The adequacy of the reserve for inventory value differences, to ensure financial statements accurately reflect the reduced value of returned stock.
- Adequacy of the provision for warranty, which relates to the client’s financial capacity to cover warranty claims.
However, the option that is not an inherent risk to consider is:
- The client’s decision to repair the laptops versus replacing them. This is a business decision that impacts operating procedure rather than an inherent risk influencing the potential for misstatement in financial reporting.
This understanding reflects shifting priorities in a world where the traditional model of planned obsolescence is being questioned in favor of sustainability and durability. With the rise of environmental awareness, the disposable economy is giving way to one where durable goods and lifetime warranties become popular, and consumers value craftsmanship and high-quality goods that are designed to facilitate upgrades or repairs.