Page 70 - CA Inter Bhaskar Vol 1

RISK ASSESSMENT AND INTERNAL CONTROL CA RAVI TAORI

Inherent Risk Definition
(QNO- The susceptibility of an assertion about a class of transaction, account balance or disclosure to a
315.11) misstatement that could be material, either individually or when aggregated with other
(MCQ- 315.20, misstatements, before consideration of any related controls.
(E.g., Retail, Jewellery, Telecom)
Incs.23.2)
Explanation of Definition AUDIT BHASKAR CH 03 - PART 01
There is always a risk that before considering any existence of internal control in an entity, a
particular transaction, balance of an account or a disclosure required to be made in the financial
statements of an entity have a chance of being misstated and such misstatement can be
material. This risk is known as Inherent Risk.

Higher Inherent Risk
Inherent risk is higher for some assertions and related classes of transactions, account balances,
and disclosures than for others. For example, it may be higher for complex calculations. External
circumstances giving rise to business risks may also influence inherent risk. For example,
technological developments might make a particular product obsolete. Factors in the entity and its
environment may also influence the inherent risk related to a specific assertion.

Example
A lack of sufficient working capital to continue operations or a declining industry characterized by
a large number of business failures.

Inherent risk factors are considered while designing tests of controls and substantive procedures.
Category of auditor's assessment lower or higher, each category covers a range of degrees of
inherent risk. Auditor may assess the inherent risk of two different assertions as lower while
recognizing that one assertion has less inherent risk than the other, although both have been
assessed as lower. It is important to consider the reason for each identified inherent risk even if the

risk is lower, when auditor designs tests of controls and substantive procedures.
(E.g., Weight of Coal can be manipulated by changing moisture content, it is inherent risk, in
purchase of coal & stock count.)

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