70.2K

Verified Solution

Link Copied!

26

Derek is currently sitting in his auditing class at a local state university, listening to the professor deliver a lecture on inherent risk and a client's property, plant and equipment accounts. Derek approaches the professor at the end of the lecture to ask fich what exactly the relationship is between inherent risk and these accounts. Which of the following represents the most appropriate response by the professor to this question? There is a clearly defined relationship between inherent risk and the clients' property, plant and equipment accounts. The best way to think about it is that when the client purchases more fixed assets, the inherent risk associated with these accounts tends to decrease. The relationship between inherent risk and a client's property, plant and equipment accounts is a fairly straightforward one. The client determines the level of fixed assets it will need to purchase in order to support business operations, and then determines its subsequent level of inherent risk. The best way to think about the relationship between inherent risk and a client's property, plant and equipment is as follows. If a client needs and uses a large amount of fixed assets to support its business operations, inherent risk is likely to be higher and vice-versa. The relationship between inherent risk and a client's property, plant and equipment accounts is best defined as a fluctuating one. For example, when a client completes major acquisitions of fixed assets via high-interest debt, inherent risk increases due to the client's increased risk of default

Answer & Explanation Solved by verified expert

See Answer