Consider the following independent situations, all of which apply to audits of entities for the year ending 31 December 20X7:
(i) Getaway Pty. Limited is a long established firm which has been operating a boutique hotel in the Blue Mountains for over 20 years. During this time, it has adopted a conservative business strategy that has seen it produce adequate, though slightly unimpressive, results. A new CEO has been appointed to run the firm from 1 September 20X7. He has already released his plans for renovating the hotel, despite not officially serving as CEO yet. You have also heard him discuss the implementation of a new marketing strategy to boost occupancy rates.
For each of the above independent situations: (1) describe the overall impact on audit risk and provide your reasons for your answer, and (2) identify the specific component(s) of audit risk affected.
Audit risk is made up of several components:
Inherent risk x control risk x detection risk
This story is about the inherent risk. That is, it describes the business scenario and therefore the pressures and vulnerabilities inherent in the client's current situation.
Long established firm: lowers inherent ...
Your tutorial is 173 words and discusses the three risk components and why this impacts one of them. Ideas are given for what might impact the other risk as a contrast.