Inherent Risk Flashcards
Inherent risks
Inherent Risk
Inherent risk refers to the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a material misstatement, regardless of internal controls.
Characteristics of Inherent Risk
1. Nature of items: Estimated items, complex transactions, or unusual events.
2. Nature of the entity and industry: High-risk industries, such as construction, or entities with complex operations.
Key Points
1. Inherent risk is independent of internal controls.
2. High inherent risk indicates a higher likelihood of material misstatement.
3. Inherent risk cannot be controlled or eliminated; auditors must accept and address it.
Auditor’s Response
Auditors must consider inherent risk when planning and performing audit procedures to ensure that sufficient appropriate evidence is obtained to support their opinion.
