How to Understand Inherent Risk in Audit Risk Assessment

Inherent risk is a big deal in SAS 145, Understanding the Entity and Its Environment and Assessing the Risk of Material Misstatement.
In this video, I explain the impact of inherent risk on audit planning and risk assessment. Using inherent risk factors, auditors will determine what areas of the financial statements to audit. Inherent risk also affects where significant risks exist in the financial statements. SAS 145 is effective for years ending December 31, 2023.
I also explain what significant classes are as well as relevant assertions.
0:00 Introduction
0:45 Think about financial statements
1:40 Materiality example
2:58 Material amounts or disclosures
4:15 RMM more than remote
5:35 Inherent risk factors
8:00 Relevant assertions
9:45 Typical assertions
11:28 Interim summary
13:07 Significant classes
14:40 Significant risk
15:55 Upper end of the spectrum of inherent risk
17:48 Estimate example as a significant risk
18:37 Test of details
19:10 Summary of how inherent risk affects planning
For more information about SAS 145, see cpahalltalk.co...
#CPAHallTalk

[@shihasks6029]

Crisp and clear...😊

[@kamsam34]

This is so incredibly helpful. Thank you for breaking it down.

[@CPAHallTalk]

Glad it was helpful!

[@mdshamimulhasan8313]

Dear Sir, Thank you for your lectures. I learned from this video how to assess inherent risks in auditing procedures. You have really made it easy for me to understand.

[@CPAHallTalk]

Glad to hear.

[@mariolopez-od7pr]

Thank you Charles! great video!, quick question, when we are looking at the material amount in the financial statement, i.e. $100K materiality, are we looking at performance materiality or overall materiality? Thank you!

[@CPAHallTalk]

Performance materiality it used in planning your audit procedures for an account balance or transaction cycle. So, if materiality is $100,000 then your performance might be $75,000. Then you plan audit procedures for an area (e.g., cash) such that no more than $75,000 in error can occur without you detecting it.