Control risk /Inherent risk

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    Topic
  • #180003
    Anonymous
    Inactive

    Guys I am sorry for bombarding the forum with questions, but in need of help.

    Is there any way to identify which one will be control and which will be inherent risk?

    For example:

    Identify in the following which involve Control/Inherent risk:

    1. A good portion of entity’s fixed asset base consists of capitalized leasehold items.

    2. Entity keeps a large quantity of cash.

    3. Entity’s financial statement do not require use of significant estimates.

    4. Employees report hours without supervisor approval.

    Ans:

    1,2,3. Inherent risk and 4. Control risk.

    How to differentiate between control and inherent? Does anyone have any trick?

    Can someone please give some ideas. thanks.

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  • #434801
    Anonymous
    Inactive

    Some people are good in explaining things. I am not.

    So I just compiled the examples I came across with during my review.

    Examples of Control Risks:

    Improper segregation of duties

    Example of an improper segregation of duties: A lack of physical controls over the safeguarding of assets allows an employee to steal company assets.

    Inadequate training to perform function

    Improper upper level mgt. review

    Double payment of invoices

    Examples of Inherent Risks:

    Human error

    Example of human error: A programming error in the design of an automated control allows an employee to give himself an unauthorized pay increase

    Management override

    Example of MOIC: Mgt's failure to enforce control policies surrounding access to inventory allows employees to steal assets.

    Technological developments that render a product obsolete

    Lack of working capital

    Decline in the overall industry or economy

    High volume transactions

    Complex calculations

    Amounts derived from estimates

    Cash transactions

    Issuance of LT debt with complex financial covenants

    #434802
    Anonymous
    Inactive

    Inherent risks are the things you cannot control. Control risks are the things you can control. (And when I say “control” at the end of each sentence, what I mean are things you have the power to change, if that makes any sense.)

    So for instance say you have a car wash. You cannot control the fact that some people will pay with cash. Cash flowing through your business is an inherent risk. You can however, through segregation of duties, control that the person who takes the payment is not the perosn who counts the cash drawer at the end of the day and reconciles the amount in there to what should be in there based on the prenumbered receipt book.

    Does that help at all?

    #434803
    peetree
    Member

    But remember! the only thing the auditor can truly control is the acceptable level of detection risk.

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