Definition of Inherent risk:
Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex, or in situations that require a high degree of judgment in regard to financial estimates. This type of risk represents a worst-case scenario because all internal controls in place have nonetheless failed.
The probability of loss arising out of circumstances or existing in an environment, in the absence of any action to control or modify the circumstances.
Inherent risk is one of the risks auditors and analysts must look for when reviewing financial statements, along with control risk and detection risk. When conducting an audit or analyzing a business, the auditor or analyst tries to gain an understanding of the nature of the business while examining control risks and inherent risks. If inherent and control risks are considered to be high, an auditor can set the detection risk to an acceptably low level to keep the overall audit risk at a reasonable level. To lower detection risk, an auditor will take steps to improve audit procedures through targeted audit selections or increased sample sizes.
How to use Inherent risk in a sentence?
- The inherent risk meant that no matter how well we performed we could still experience an immense loss in the business.
- Many projects will have a certain inherent risk and you will need to judge if the rewards will outweigh it.
- I realized that there was an inherent risk in letting my son join the company without and qualifications at all.
Meaning of Inherent risk & Inherent risk Definition