Question

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?

1)The entity's fiscal year ends on June 30.
2).The entity enters into transactions with high estimation uncertainty.
3)The entity's financial statements are generated at an outside service center.
4).The entity's financial data are available only in computer-readable form.

Answer 1

In planning an audit, inherent risk factors such as transactions with high estimation uncertainty are critically assessed by auditors to prevent misstatements in financial statements.

Step-by-step explanation:

When planning an audit, auditors assess inherent risk factors that could potentially affect the financial statements of the entity they are auditing. Looking at the options provided, the matter that an auditor would most likely consider as an inherent risk factor is 'The entity enters into transactions with high estimation uncertainty'. This is because transactions with high estimation uncertainty, such as those involving complex financial instruments or assumptions that can significantly influence valuations, may increase the likelihood of misstatements in the financial statements. These risks are inherently part of the financial reporting process and not necessarily related to errors or fraud. The auditor may need to apply more testing and analytical procedures to these areas to ensure the risk of misstatement is adequately controlled.