Question 2
To determine inherent risk the auditor will usually look for such factors as client business risk, examine the business industry and business environment. Auditors need to look at certain industries and be able to familiarize themselves with certain inherent risks that could occur. The auditor needs to be able to understand the competition that exists within the industry, any economic conditions and regulatory laws that the business must follow. The auditor will also look at how business operations processes work and whether or not they are similar or different from companies within the industry. This knowledge could be used as a benchmark or key way for auditors to assess inherent risk. Related party transactions can also be used …show more content…
Some of the problems of having inside directors are that independence is severely threatened. Board of Directors are in charge of making sure management is acting ethically and responsibly, and it’s easier to become unethical if you’re monitoring yourself. The Board of Directors are supposed to make sure management is implementing proper internal controls, and if the board has inside senior managers then they can lie and say they’re proper controls when really they could be overriding controls or committing fraud. It is easier to manipulate results and commit fraud if you’re an inside director, because the board of directors are supposed to be governing management and protecting the shareholders, and you could hurt the shareholders and the company if you act selfishly for your own personal gain. Since the board of directors are supposed to be outside of management, they can suggest firing managers they don’t agree with, they can offer higher incentives to themselves for reaching mediocre business performance goals, this could make them put their own personal lives ahead of the