Frontenac Construction,your audit client,is a construction company.In the initial planning phase of the audit,you identified that it has many contracts with severe non-performance clauses if any of the current constructions are not completed on the dates set in the contracts over the next three years.As the auditor,you would set the inherent risk for sales and penalties as
A)high.
B)moderate.
C)low.
D)unknown: this cannot be determined until more procedures are performed.

Question

Quizplus · Accepted Answer

The presence of severe non-performance clauses in contracts indicates a high risk of material misstatement for sales and penalties. This is because failure to comply with the terms of these contracts may result in significant penalties and financial losses, which could impact the financial statements. Therefore, the inherent risk for sales and penalties should be set as high, and appropriate audit procedures should be performed to address the identified risks.

Frontenac Construction,your Audit Client,is a Construction Company