UK AUDITORS' PERCEPTIONS OF INHERENT RISK

Abstract

In March 1995, the APB in the UK issued its Statements of Auditing Standards 300 (SAS 300): «Accounting and Internal Control Systems and Audit Risk Assessment». The standard identifies inherent risk as one of the three components of audit risk; inherent risk being defined as «the susceptibility of an account balance or class of transactions to material mis-statement». If the inherent risk is low, less substantive testing is required, with possible resultant savings in staff time and audit costs. It is thus beneficial for audit firms (and clients) to assess adequately the inherent risk element of an audit assignment to ensure that audits are carried out as efficiently and effectively as possible. This research project focuses on inherent risk and using a questionnaire survey investigates 100 auditors' perceptions of the importance of certain factors which may determine inherent risk. The findings of the study suggest that the variables identified in the literature as being closely associated with inherent risk factors are regarded in a similar fashion by auditors; variables such as bonus schemes tied to management earnings, a high turnover rate in top management personnel, a company reputation for taking unusual business risks and a history of material errors are believed to be the major determinants of inherent risk. Perhaps unsurprisingly, the findings of this study suggest that auditors attach greater importance to high risk variables than to low risk variables in their evaluation of inherent risk. Finally, the evidence revealed that auditors had difficulty in distinguishing between inherent risk and control risk factors.