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Inherit risk is set for audit objectives for segments rather than for overall audit because of misstatements at the objectives levels. This type of risk means that the reports have material misstatements regardless of the internal controls in place ( Inherent risk vs. control risk: Whats the difference?, 2020). Misstatements happen at the objective level within a segment, and therefore, it is necessary to determine the risks for individual segments rather than for the entire audit. Notably, inherit risks are unavoidable, and therefore, the auditor must ensure that they are detected, and sufficient evidence is accumulated to illustrate the problem ( Examples of inherent risk, 2019). Therefore, the auditor needs to examine each segment separately to determine if there was an inherent error or not since the characteristics of the segments and the complexity of operations in each vary.
When the inherent risk changes from medium to high for an audit objective, the amount of evidence that the auditor must collect increases. This is necessary to ensure that the auditor has enough evidence to show that the misstatements actually occurred (Tuovila, 2020). Moreover, the ability to set risk at different levels for different segments allows the auditor to determine the amount of evidence they will need to collect at each level. For example, when a financial statement is complex, the inherent risk happens due to factors other than those related to an error of control. This can be an omission or a mistake that is linked to the complexity of this statement. More specifically, if the company states that its debt risk is below 60%, it is placed in a medium risk category, and the amount of evidence needed to examine the financial situation is limited. However, if the auditor discovers that, in fact, the risk is at 75%, which is a high-risk situation, the amount of evidence needed will be much higher.
References
Examples of inherent risk. (2019). Web.
Inherent risk vs. control risk: Whats the difference? (2020). Web.
Tuovila, A. (2020). Inherent risk. Investopedia. Web.
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