CPA Exam — AUDAssessing Risk and Developing a Planned ResponseHard
When developing an overall audit strategy, an auditor determines that the client operates in a highly competitive and rapidly evolving industry. This environmental factor would most likely increase the auditor's assessment of inherent risk related to:
- AThe auditor's ability to obtain sufficient appropriate audit evidence.
- BThe effectiveness of the client's internal controls.
- CThe going concern assumption.
- DThe completeness of related party transactions.
Show answer & explanationAnswer & explanation
Correct answer: C. The going concern assumption.
A highly competitive and rapidly evolving industry introduces significant business risks, such as technological obsolescence, intense price pressure, and short product life cycles. These factors directly increase the uncertainty regarding the entity's ability to continue as a going concern, which is an inherent risk consideration.
Why the other options are wrong
- A. While industry complexity might make evidence gathering more challenging, the direct inherent risk from the industry environment itself is more focused on the business viability rather than the auditor's ability to collect evidence.
- B. The effectiveness of internal controls is control risk, not inherent risk. While industry factors can influence control design, they don't directly increase the susceptibility to misstatement before considering controls.
- D. Related party transactions are a specific area of inherent risk, but the broad industry characteristics described do not specifically or primarily increase the risk of incomplete related party transactions over the going concern assumption.
Inherent Risk (Going Concern)
Inherent risk related to going concern arises from conditions or events that cast significant doubt on the entity's ability to continue as a going concern.
- Economic conditions, industry decline, and competition are key factors.
- Management's ability to respond to these challenges is critical.
- Requires significant judgment and forward-looking assessment.
Memory trick: Rapid industry changes make 'GOING CONCERN' a 'RISK'.