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Business risk and inherent risk both bear on the audit; the audit risk model; and the nature, timing, and extent of work performed. Inherent risk and business risk bear an inverse relationship to detec‐tion risk and have a direct effect on the level of work performed. Neither risk can be eliminated totally and neither is controllable by the auditor. Business risk relates to the financial statements and affects overall audit risk; inherent risk applies to an individual audit area. Inherent risk is explicitly included in the professional standards and the audit‐risk model while business risk is not and has only an indirect bearing on the model. Management can take steps to affect the level of inherent risk, but the perceptions of users of the financial statements bear on business risk.

This study aims to examine the mediating effects of corporate governance mechanisms like the board of directors on the association between disruptive technology adoption by audit clients and the risk of material misstatements, including inherent risk and control risk. In particular, the authors study the mediating effects of board characteristics such as board size, independence and gender diversity.

Based on a sample of 100 audit clients listed on the FTSE 100 from 2015 to 2021, this study uses structural equation modelling to test the research objectives.

The findings indicate a significant and negative association between disruptive technology adoption by audit clients and inherent risk. However, there is no significant evidence observed for control risk. The utilisation of disruptive technology by the audit client has a significant impact on the board characteristics, resulting in an increase in board size, greater independence and gender diversity. The authors also find strong evidence that board independence mediates the association between disruptive technology usage and both inherent risk and control risk. In addition, board size and gender exhibit distinct and differential mediating effects on the association and across the two types of risks.

The study reveals that the significant role of using disruptive technology by audit clients in reducing the risk of material misstatements is closely associated with the board of directors, which makes audit clients place greater emphasis on the construction of effective corporate governance.

This study offers essential primary evidence that can assist policymakers and standard setters in formulating guidance and recommendations for board size, independence and gender quotas, ensuring the enhancement of effective governance and supporting the future of audit within the next generation of digital services.

With respect to relevant stakeholders, it is imperative for audit clients to recognise that corporate governance represents a fundamental means of addressing the ramifications of applying disruptive technology, particularly as they pertain to inherent and control risks within the audit client.

This study contributes to the existing literature by investigating the joint impact of corporate governance and the utilisation of disruptive technology by audit clients on inherent risk and control risk, which has not been investigated by previous research.

This paper examines the perceptions of senior auditors in large firms in Sydney, Kuala Lumpur and Auckland concerning the nature and assessment of the inherent risk in risk based auditing. The geographic dispersion of participants from internationally linked firms does not appear to result in any cultural and geographic effects. Assessment of inherent risk appears predominantly qualitative and is not necessarily linked to the comprehensive aggregation of risks typically presented in audit risk models. There is some blurring of control risk factors with inherent risk and one‐third of participants assess inherent and control risk jointly. Risk factors appear to be grouped in importance in a manner that suggests different attitudes to management, system‐oriented, environmental and oversight risks. The identification of four possible factors (internal risk, external risk, system risk and oversight threats) may provide a basis for further investigation of how auditors assess inherent risk. There is an apparent division between “internally” and “externally” sourced risk.

The objective of this research is to identify those industry‐specific elements of the financial statements of listed South African long‐term insurers that are potentially exposed to the highest level of inherent risk. Auditors of these companies should focus on these elements to ensure effective and efficient audits. An exploratory literature study was conducted. A questionnaire was subsequently used to identify significant accounts potentially exposed to the highest level of inherent risk. Relative levels of inherent risk were measured using a “Relative Inherent Risk Index” that had been specifically developed as part of this research. The research indicates that policy liabilities and operating profit from long‐term insurance activities are potentially exposed to a significantly higher level of inherent risk than the other industry‐specific elements of the financial statements of long‐term insurers.

The main purpose of this study is to gain insight into Bahraini auditors' perceptions of the importance of 17 variables in the assessment of inherent risk of various audit assignments. The study also seeks to examine whether differences exist in the evaluation of variables, influencing the assessment of inherent risk between auditors working for the Big‐Six accounting firms and those working for local or regional firms and between auditors practicing in Bahrain and those practicing in the UK. A questionnaire was distributed and responses from 58 auditors were received. The study found that auditors practicing in Bahrain have difficulties in identifying variables associated with the assessment of inherent risk. Of the 17 variables examined in this study, only six variables were identified by the majority of Bahraini auditors as inherent risk factors. The results also suggest that statistically significant differences exist between auditors working with “Big Six” firms and those working for local/regional firms with respect to identification of selected variables as inherent risk factors and their importance in the assessment of inherent risk. Finally, the findings suggest that UK auditors appear to be better trained than their Bahraini counterparts at identifying factors affecting inherent risk.

This exercise provides comprehensive coverage of audit materiality, assessing inherent risk, and allocating tolerable misstatement appropriate for an undergraduate auditing course. The Delphi method could be an appropriate tool in any accounting setting where the learning goals involve judgment, consensus, or learning through group interaction.

This chapter describes a classroom exercise that required students to establish planning materiality, assess inherent risk associated with balance sheet accounts, and allocate tolerable misstatement using a modified application of the Delphi method. Additionally, the exercise calls attention to group processing skills and the role played by professional judgment in planning an audit. We assigned students to five-person audit teams and through a series of Delphi rounds asked them to establish planning materiality and assess the inherent risk associated with each balance sheet account for a fictitious company. Students prepared a matrix, both individually and as a team, that compared each statement account to every other account to determine which account in each pairing they viewed as having higher inherent risk. As a final step, they allocated tolerable misstatement mathematically for each account based on pairing results.

The result was a consensus of opinion and an early attempt at forming professional judgment. The students’ responses to a debriefing questionnaire and the results of a pre-/post-test suggest that the learning objectives of the exercise were met.

The specific learning objectives of the exercise were to help students understand the concepts of tolerable misstatement and planning materiality, the elements of inherent risk, the Delphi method for reaching group consensus, the need to work as a team, and the importance professional judgment plays in the audit process. The result was a consensus of opinion and an early attempt at forming professional judgment. The students’ responses to a debriefing questionnaire and the results of a pre-/post-test suggest that the learning objectives of the exercise were met.

The purpose of this paper is to examine whether auditors interpret the risk of material misstatement (RMM) in accordance with current standards' definition of inherent risk (IR). It is argued that controls should not be presumed when assessing inherent risk and that inherent risk should be considered separate from and prior to control risk when it is practical to do so. Because auditing standards explicitly require auditors to assess IR without consideration of internal controls (i.e. control risk (CR)), RMM should not be adjusted upward for control deficiencies.

The authors survey and interview practicing auditors to gain an understanding of current risk assessment practice. They then evaluate whether their understanding of risk assessment is in line with current standards.

Contrary to auditing standards' definition of inherent risk, it appears that auditors presume some level of expected control effectiveness when assessing IR and they may increase RMM in response to internal control deficiencies. Such a presumption is inconsistent with the definition of inherent risk from the Auditing Standards Board (SAS No. 107), Public Company Accounting Oversight Board (AS 8), and International Auditing and Assurance Standards Board (ISA 200). Such misinterpretation may be an inadvertent result of guidance provided by standard setters in the form of SAS No. 109 from the ASB, AS 12 from the PCAOB and ISA 315 from the IAASB, which suggest combining IR and CR into RMM.

The research is limited both by the small sample size and the small number of risk factors investigated.

If auditors presume a level of controls in assessing inherent risk, they may reduce audit effectiveness by estimating a lower RMM than is appropriate.

This study presents insights on the interpretation and assessment of audit risk in audit environments where inherent risk is no longer automatically set to be at the maximum. Namely that due to the definition of inherent risk, control information should have a unidirectional downward effect on the risk of material misstatement.

Risk is closely associated with return of investments and materiality. Investments with considerably higher risk normally attract a higher rate of return. Whereas, higher level of risk needs a higher threshold of materiality. There are occasions in which financial managers, fail to take the materiality effects in the process of risk evaluation. This paper assesses risk in the auditing context. Audit risk models established by researchers reveal that there is a need to look into the effects of materiality. An extension on the existing audit models, to incorporate the effects of materiality is made. With this, 128 permutations were resulted. It is understandable that auditors may not be cost benefit for auditors to evaluate all the 128 possible outcomes before the issuance of audit reports; however, this by no means prevents auditors being sued for negligence due to neglecting one of the possible audit outcomes. This model could seriously be served as a reference to both auditors and financial managers in the light of evaluating risk.

Internal auditors should consider the risks pertinent to an auditee when planning the work. Internal auditors may select a procedures‐driven approach or a risk‐driven approach. In a procedures‐driven approach, the audit procedures are chosen without full consideration of the risks present. Rather, the internal auditor may use procedures because they are commonly employed or because they were used on the last examination of the auditee. In a risk‐driven approach, specific procedures are planned only after consideration of the risks. A risk‐driven approach is generally more effective and efficient than a procedures‐driven approach because the internal auditor′s efforts are focused on areas with relatively more risk.

Part IV provides readers with the extant requirements for the application of materiality to recognition, measurement, presentation, and disclosure in the financial statements. This part also includes a detailed critical review of the recent Practice Statement on materiality, the FASB’s proposed ASU on the notes and the amendments to the Conceptual Framework proposed by the IASB and the FASB.

The part expands to issues that are typical of Management Commentary, including the SEC guidance on materiality in Management Discussion and Analysis.

It informs about the complexities and subtle differences between financial statements and bookkeeping and the different standards of reasonableness versus materiality.

A section moves from materiality to material misstatements and covers the application of materiality in auditing.

Another section goes in depth on internal control over financial reporting, showing the linkages between materiality and risk appetite and risk tolerance and the related application guidance.