Certified Information Systems Auditor Practice Exam

Inherent risk refers to the susceptibility of an assertion about a class of transactions or an account balance to a misstatement, assuming there are no related controls in place. This type of risk arises from the nature of the business or the environment, such as complex transactions, estimates, or conditions that inherently increase the likelihood of errors or fraud. The concept of inherent risk operates under the assumption that there are no compensating controls to mitigate that risk. For example, in a situation where a business operates in a high-risk industry or has a complex financial structure, the inherent risk would be higher in that area due to the lack of any controls that would normally help reduce that risk. Recognizing inherent risk is crucial for auditors, as it guides them in assessing areas that may require more in-depth review during the audit process. The incorrect options relate to different aspects of audit risks. Control risk is the risk that a misstatement that could occur would not be prevented or detected by the entity's internal controls, while detection risk is the risk that the auditor will not detect a misstatement. Residual risk is the risk that remains after management has taken action to mitigate risks through controls. Thus, inherent risk specifically indicates the risk linked to the nature of the entity without