Inherent risk factors in auditing accounting estimates
ISA 540 (Revised) Auditing accounting estimates and related disclosures introduces the concept of inherent risk factors and requires the auditor to consider the degree to which accounting estimates are affected by these factors in identifying and assessing the risks of material misstatement. This Audit and Assurance guide explains what inherent risk factors are and how they may influence your audit of accounting estimates.
Accounting estimates are subject to, or affected by, risk factors that influence the likelihood and magnitude of a potential misstatement. These factors include:
The degree to which these inherent risk factors affect the likelihood or extent of misstatement varies on a scale which ISA 540 (Revised) refers to as the spectrum of inherent risk. Where the assessed risk sits on this spectrum will determine what the audit response needs to be.