Inherent risks can be classified according to their nature, such as “unusual pressure on management” or “account likely to require adjustments”; and also as either a “financial report level inherent risk” or an “assertion level inherent risk”.

In the Table below (column A) are listed a number of situations that can give rise to inherent risks. Classify each situation by its nature (Column B) and as either a “financial report level inherent risk” or an “assertion level inherent risk” (in Column C). The first situation is classified as an example:

A	B	C
Situation	Nature of the inherent risk	Level of the Inherent risk
Management was recently notified by head-office that allowable variances from budget would be reduced.
Your client of five-year’s standing, Fred’s Furniture, has repeatedly underestimated the provision for doubtful debts.
You are auditing Grand Casino, a business that always has large amounts of cash on the premises.
Your client has many contracts for the purchase of raw materials and the sale of finished goods that are denominated in foreign currencies.
Your client operates a fishing charter business. Restrictions put in place due to a public health emergency have led to a closure of the aquatic leisure industry.
During the year, the Chief Financial Officer, who had held the position for ten years, retired. Her replacement was new to the industry.
Your client is a gold miner that capitalises some exploration expenditures.
Your client operates in an industry in which has experienced significant disruption because of the growth of the gig-economy
Your client is based in Australia operates in five other countries.
Your client is a retailer of designer fashions.
Just prior to balance date, your client disposed of a business to an associated company.

Answer rating: 100% (QA)

A B C Situation Nature of inherent risk Level of inherent risk Management was recently notified by h View the full answer