Inherent risk

Inherent risk, in auditing, is the risk that the account or section being audited is materially misstated without considering internal controls due to error; inherent risk does not include an assessment of the risk of material misstatement due to fraud. The assessment of inherent risk depends on the professional judgement of the auditor, and it is done after assessing the business environment of the entity being audited.

Range of assessment

Inherent risk is typically assessed using a scale, with assessments being either low, medium, or high. Assessments of medium or high will require additional audit work performed to conclude that management's assertions are appropriate.

Factors in assessing inherent risk

Considerations which an auditor may include in assessing inherent risk include:

* complexity of determining the account amount (if it is an estimate or a financial statement disclosure)
* past history (including any audit differences identified)
* the circumstances of the entity's business environment
* management's overall risk awareness

For example, the valuation of accounts receivable would have a higher inherent risk assessment since the amount of allowance is subjective and is an accounting estimate. In contrast, cash and cash equivalents would have a lower inherent risk assessment as the amount that is concrete or tied to an outside source.

See also

* Risk Assessment
* Control Risk
* Detection Risk

External links

[ Discussion of inherent risk]

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