Inherent risk as an insurance company the nature of industry determined that

Inherent risk as an insurance company the nature of

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1. Inherent risk: as an insurance company the nature of industry determined that EF’sinherent risk is high, because the measurement of critical financial features had to beguessed more.52. Control risk: There was almost no internal control procedure throughout the
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company. Tthe frauds were perpetrated by the management and employees. There isno audit committee. 3. Detection risk: as AR=IR*CR*DR, when both inherent risk and control risk arehigh, if maintain audit risk in a low level auditor should reduce detection risk bycollecting and evaluating sufficient and appropriate evidence as much as they cantobe able to draw reasonable conclusions on which to base the audit opinion.However,in this case auditor failed to collect and evaluate sufficient and appropriate evidence,because they were not independence--- the manager in charge of the audit had a sonwho was on Equity Funding’s payroll. HIH:HIH’s inherent risk and control risk were also high, because it was also an insurancecompany. Internal control was inefficient as the dominant senior manger. In thissituation, the auditors were supposed to collect sufficient and appropriate evidence toreduce detection risk. However, they highly relied on internal evidence, which wasextremely unreliable, especially when fraud was perpetrated by
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