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What is inherent risk?

Beginner

Answer

Inherent risk is the susceptibility of an assertion or account to material misstatement, before considering related controls, due to its nature or circumstances—complexity, estimation, susceptibility to fraud, or volatile conditions. Cash is lower inherent risk than complex financial instruments or management estimates, which are higher.
Real-world example Fair-value estimates for illiquid assets carry high inherent risk due to judgment and uncertainty.

Common follow-ups: What factors raise inherent risk? | How does inherent risk differ from control risk?