Inherent risk, in
risk management, is an assessed level of raw or untreated
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environm ...
; that is, the natural level of risk inherent in a process or activity without doing anything to reduce the likelihood or mitigate the severity of a mishap, or the amount of risk before the application of the risk reduction effects of controls. Another definition is that inherent risk is the current risk level given the existing set of controls, which may be incomplete or less than ideal, rather than an absence of any controls.
Inherent risk is contrasted with
residual risk The residual risk is the amount of risk or danger associated with an action or event remaining after natural or inherent risks have been reduced by risk controls.
The general formula to calculate residual risk is
: \text = (\text) - (\text)
wh ...
, which is the amount of risk left after treatment and added security measures.
See also
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Inherent risk (accounting)
Inherent risk, in a financial audit, measures the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in segment before considering the effectiveness of internal control. If the auditor concludes that ...
, particularly, the consideration of the probability of material misstatements in financial records
References
Risk_management
Auditing terms
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