ExpertMedium1 markMultiple Choice
CPA · Question 14 · Area 2: Risk Assessment
Which of the following factors would most likely increase Inherent Risk for the valuation assertion of the inventory account?
Which of the following factors would most likely increase Inherent Risk for the valuation assertion of the inventory account?
Answer options:
A.
The company uses a perpetual inventory system.
B.
The inventory consists of high-tech electronic components subject to rapid obsolescence.
C.
The warehouse is secured by biometric locks.
D.
The auditor has identified a material weakness in the inventory count procedure.
How to approach this question
Distinguish Inherent Risk (nature of the item) from Control Risk (systems/procedures).
Full Answer
B.The inventory consists of high-tech electronic components subject to rapid obsolescence.✓ Correct
The inventory consists of high-tech electronic components subject to rapid obsolescence.
Inherent risk is the susceptibility of an assertion to a misstatement that could be material, assuming that there are no related controls. Complex valuation or high obsolescence risk are classic inherent risk factors for inventory valuation.
Common mistakes
Confusing Inherent Risk with Control Risk (system/security issues).
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