ICAEW ARF · Chapter 3 · Question 7 of 13
Which of the following is most likely to indicate a high inherent risk?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) The client holds a large inventory of fashion clothing whose saleability depends on changing trends
Explanation
Inherent risk is the susceptibility of a balance to misstatement before considering controls. Fashion inventory may become obsolete quickly, making its valuation at the lower of cost and net realisable value subjective. Poor segregation of duties is a control risk, while inexperienced staff and reduced samples increase detection risk.
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