Rapid change: A business whose inventory becomes obsolete quickly experiences high inherent risk.
Expiring patents: Any business in the
pharmaceutical industry also has inherently risky environment and
external factors. Drug patents eventually expire, which means the
company faces competition from other manufacturers marketing the same
drug under a generic label.
State of the economy: The general level of economic growth is another external factor affecting all businesses.
Availability of financing: Another
external factor is interest rates and the associated availability of
financing. If your client is having problems meeting its short-term cash
payments, available loans with low interest rates may mean the
difference between your client staying in business or having to close
The three steps involved in assessing the risk of material
the type of potential misstatement(s) that may occur, such as evaluating
whether a risk is a financial statement level risk or an assertion level risk.
the magnitude of the potential misstatement(s).
For example, the auditor is attempting to determine if the magnitude
could of misstatement could aggregate to a material amount.
the likelihood of potential misstatement(s).
This is a matter of determining whether the probability of misstatement
is very probable or the probability of misstatement is remote.
Dec 7th, 2014
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