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Doran CPAs is currently performing the audit of one of its largest clients; a multinational pharmaceutical company. During an initial planning meeting, the partner with overall responsibility for the audit has noted that the client operates in an industry which is very highly regulated, and that the client spends considerable sums of money each year on compliance. As a result of this finding, which of the following is correct?

The client is likely to represent higher inherent risk because the clients revenue recognition procedures are considered by the auditor to be straightforward.

The client is likely to represent lower inherent risk because the industry the client operates in is highly regulated.

The client is likely to represent higher inherent risk because the client operates in an industry that is highly regulated.

Generally accepted accounting standards require the external auditors to obtain specific written assurances from senior management for all audit areas deemed to be higher inherent risk.

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