AUD – Control Risk and Inherent Risk

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This topic contains 2 replies, has 3 voices, and was last updated by  IwannaBaCPA 6 years, 2 months ago.

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    I'm having a hard time understanding why

    1) Control Risk decreases as a result of the internal audit dpt distributing payroll checks to employees for selected payroll cycles.

    2) Inherent Risk increases as the company extends it's existing warranty program on some of its major products in an effort to increase revenue.

    This is from a simulation on the AICPA's website…



    Control Risk decreases because someone other than the payroll dept is distributing the paychecks. The custody function is kept separate from the recording function because the internal audit department is distributing the checks, not payroll.

    Inherent Risk increases because the company is extending more warranties on their products. Without controls, the risk the F/S (warrantly liability) could be understated increases.



    Well put Susan. I totally agree!

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