Inherent risk: An investigation of auditors' judgments

Abstract

The assessment of inherent risk is a judgment required of auditors by Statement on Auditing Standards 47 (Auditing Standards Board, AICPA, New York, 1983) that normatively affects the scope of work performed on audit engagements. This study explores the judgments of auditors concerning inherent risk in inventory. Four inherent risk factors were examined: turnover of the controller, financing pressure, the amount of complexity of overhead in inventory, and the quality of the personnel responsible for the inventory calculation. A human information processing approach employing ANOVA was utilized to determine the relative reliance on these factors in the inherent risk judgments of 65 practicing auditors. Correlation techniques were used to measure consensus, reliability, and self-insight. The results suggest that although all four inherent risk factors were important to auditors, quality of personnel was the most significant. Reliability was slightly lower than in previous research, but was still fairly high. Self-insight was moderate.