Inherent risk

Inherent risk refers to the level of risk that exists in the absence of any controls or mitigation measures. It represents the natural level of risk associated with a particular activity, process, or environment before any actions are taken to reduce it.

Key Points about Inherent Risk:

  • Baseline Risk: It’s the starting point for risk analysis.
  • Uncontrolled Risk: It assumes no safeguards, policies, or procedures are in place.
  • Used in Auditing and Risk Management: Commonly used in financial auditing, cybersecurity, and operational risk assessments.

Example:

In a financial audit, the inherent risk might be high for a company that deals with complex financial instruments, even before considering internal controls like audits or compliance checks.

Would you like to see how inherent risk compares with residual risk (the risk remaining after controls are applied)?

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