What is Inherent Risk?

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Inherent risk is a type of risk associated with auditing. It is the risk related to the errors found in the financial documents of a company. At the end of every year, every company which is bound to go through an auditing process faces such risks. Therefore, the auditor assesses the inherent risk after examining the audited organization’s environment. The percentage that should be allocated to inherent risk depends on the auditor’s judgment, which is why hiring a very skilled professional is required. At times, the inherent risk can be 2% and at times it can be 5% depending on the organizational structure of a company. This means that the auditor judges to let go of a certain percentage of the errors found in the financial documents while auditing them.

Scale used for Assessing Inherent Risk:

Inherent risk is always stated as being low, medium or high. This judgment is made after assessing the risk through a particular scale. Situations in which the risk is high or medium requires a bit of extra work to be performed to conclude that the management’s declarations are correct. In this context, inherent risk is also widely defined as a type of risk which is unable to manage. The chances of inherent risk are always there no matter what type of a strategy the organization adopts.

The Basic Factors Involved:

An auditor can take the following into consideration while determining the inherent risk:

-          Complications involved in determining the final account amount

-          The overall risk awareness of the management

-          The environment of the business and its current situation (the more the fluctuations are, the more the inherent risk will be)

The auditor makes a judgment keeping all these factors in mind. Once the inherent risk is determined, the auditor then starts with the auditing session. The percentage determined for inherent risk remains the same, and the organization enjoys a certain amount of negligence to the errors in the process.

Further reading: Corporate Governance | Audit | Performance Improvement

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