The risk that arises from an error, omission or misstatement in a financial statement due to an inherent factor (other than a failure of internal control). A financial statement is said to be exposed to inherent risk if it is probable that it would become defective due to error, omission, or misstatement, associated with factors beyond the reach of internal controls.
Generally, inherent risk is the natural risk associated with a process that has not been subject to mitigation or control by means of risk management. In accounting, it indicates the probability of any material misstatements in financial reporting instigated by non-intervention factors. It can also be defined as the susceptibility of an assertion about a type of transaction, account balance or disclosure that occurs due to a defective situation that could reach material proportions, either on its own or on aggregated basis with defective occurrences, and usually before interventional controls are set in place.
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