Final answer:
The correct option is option 2. Inherent risk is related to the susceptibility of an account to misstatement, and among the given options, 'Client has sufficient working capital and is not at risk of violating loan contracts' is the one that indicates lower inherent risk.
Step-by-step explanation:
The question pertains to inherent risk which is the susceptibility of an account balance or class of transactions to misstatement that could be material, either individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls. Inherent risk factors often include complex financial transactions, operations susceptible to economic changes, and areas requiring significant judgment or estimation. Let's evaluate the provided options:
- Technological developments in the client's industry that increase the risk of obsolescence of certain assets is an inherent risk as it could lead to rapid devaluation of assets.
- Client has sufficient working capital and is not at risk of violating loan contracts indicates lower inherent risk because the company's financial stability suggests a reduced likelihood of material misstatement.
- Transactions or account balances derived from significant estimates usually contain higher inherent risk because they involve greater judgment and potential for error.
- The client's location being at risk of natural disasters such as hurricanes and flooding is another factor that introduces higher inherent risk by potentially affecting the business operations and asset values.
Given these factors, the option that indicates lower inherent risk is option 2: Client has sufficient working capital and is not at risk of violating loan contracts. In conclusion, the correct option is option 2.