Peer Review Inherent Risk Questions Revised
Separate inherent risk assessments are not required by GAAS; however, changes to peer review checklists (several months ago) were causing “no” answers (which implies a deficiency) when audit firms did not use separate practice aids to assess inherent risk.
These “no” answers were an unintended consequence of the way the peer review inherent risk questions were worded. (I scratched my head the first time I saw them.) The questions are now revised.
Now the peer reviewer will focus on the risk assessments related to the risk of material misstatement (RMM) (which is the result of the control risk and the inherent risk). The revised questions still ask the reviewer to consider if the RMM is impacted by a less-than-high inherent risk assessment.
The intent of the inherent risk questions, I believe, is to cause the reviewer to consider whether the inherent risk assessment is appropriate and not used to falsely reduce the amount of substantive work.
Remember Inherent Risk x Control Risk = RMM, so an auditor could lessen his response to risk (substantive work) by lowering the inherent risk (without a proper basis for doing so).
What does this mean for you? Make sure you can defend your lower inherent risk assessments (provide a logical explanation for the lower IR assessment).