Inherent risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls. Every company cannot apply the procedure that gives the accurate result to them, the result is basically inherited by the risk factors as the procedure is applied to just a small sample of the population rather than on the whole population. This can lead to the misstatement which is said to be the inherent risk.
The term inherent risk is used in auditing and accounting, if there are higher chances of material misstatement in the financial statement, the inherent risk is said to be high. For making the broader view of this term, it is also used for the misstatement of the transactions which are present in the financial statement.
If the auditors will not guard these inherent risks, there would be more errors in the financial statement which definitely will lead the management to the wrong direction and thus the financial statement will not be presenting true and fair view. The auditors had to focus a lot to make an error free or inherent risk free financial report in order to make their company to move in the right direction by making accurate decisions.
According to the auditor’s point of view, inherent risk improves the auditor's risk as the inherent risk is the component of it. So it is necessary to reduce the inherent risk in order to reduce the auditor’s risk. The inherent risk will lead the auditors to make inappropriate decisions because the evidence to back such opinion will be untrue.
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