24 October 2011
Inherent Risk - The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
25 October 2011
Inherent Risk as given by you is in SA-315.
Imagine you are the auditor of an entity in which there are no controls at all.
Then what will be the risk of material mistatements. It will be very high. That risk is called the Inherent Risk.
The terms "Before considering the Related controls" means this.
Generally the auditor should assess the risk of material misstatements at the financial statements level and the transaction and account balance level.
While conducting this assessment you should consider the COMBINED level of the Inherent Risk and the CONTROL Risk.
Then Question comes what is the control risk. Control risk is one which: Where the entity has the controls but they doesn't work properly.
Then what will be the risk of material mistatements? This is called the Control Risk.
Then compare the degree of both risks.
the results of which determine the Nature Timing Extent of the substantive procedures to be performed by the auditor.
If the risk is high, the auditor shall perform the substantive procedures to the greater extent.
If the Risk is low, the auditor can rely on the internal controls operated by the entity.
What u do the Assessment of Inherent Risk and control risk is the COMPLIANCE Procedures.
The results of compliance procedures will determine the extent of substantive procedures to be performed.
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