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Audit risk is the risk of provision of inappropriate audit opinion by the auditor in the situation where financial statements of the company are materially misstated. There can be various reasons due to which audit risk arises (Bell, Landsman & Shackelford, 2001). The process of audit suffers from some inherent limitations which imposes the various kinds of risks on it. Inherent risk is one of the major element of audit risk that is imposed on the entity due its inherent nature. It is the risk of occurrence of material misstatements in financial reports due to errors and omissions other than control failures. This type of risk exists irrespective of the audit of the financial statements (Cassell, Drake & Rasmussen, 2011). Therefore, it is impracticable to avoid such risk even with the help of creation of adequate controls in audit procedures and enhanced audit training.  In the present case inherent risk is particularly high because of the fact that company belongs to the industry where the product designs are considered to be quite sensitive. These designs of vehicles of every carrier manufacturing company generally requires to be maintained confidentially due to high competiveness in the market place. Since, the company has adopted a new system of costing to replace the old system which was not compatible with the needs of the company.

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