A few key factors can increase inherent risk.
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 its
The three steps involved in assessing the risk of material misstatement are:
1. Evaluate 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.
2. Evaluate 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.
3. Evaluate 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.doors.
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