auditing definition needed?

Question

in auditing, the equation for audit risk is
Inherent risk x Control risk x Detection risk

What is meant by inherent risk - can you give me some examples

Answer 1

Inherent risk is the susceptibility of an assertion to a material misstatement, assuming that there are no related controls. The risk of such misstatement is greater for some assertions and related balances or classes than for others. For example, complex calculations are more likely to be misstated than simple calculations. Cash is more susceptible to theft than an inventory of coal. Accounts consisting of amounts derived from accounting estimates pose greater risks than do accounts consisting of relatively routine, factual data. External factors also influence inherent risk. For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement. In addition to those factors that are peculiar to a specific assertion for an account balance or a class of transactions, factors that relate to several or all of the balances or classes may influence the inherent risk related to an assertion for a specific balance or class. These latter factors include, for example, a lack of sufficient working capital to continue operations or a declining industry characterized by a large number of business failures.

Answer 2

Inherent risk is the susceptibility of the asset to risks. In other words some assets are more likely to be Stolen, burned,misplaced than other. This is an example:
If there is a pile of coal worth $100 and a $100 bill next to each-other, the bill has a higher inherent risk of being stolen. if there is a wooden house and a stone house the wooden house will have a higher inherent risk to burn down. I hope this is enough. So the formula then says in words ( if you have a wooden house (High inherent risk) )x ( fire suppression systems (good controls))x (smoke detectors (good detection)= how much should we audit this house for fire (risk)

Answer 3

Inherent risk is the risks that face the business simply because the company exists. This means items such as recession, industry issues, complex transactions, changes in laws and regulations all contribute to the inherent risk calculation.

You cannot do anything about inherent risk, unlike control risk which can be reduced.

Answer 4

Inherent risk(IR)
Inherent risk is the measure of auditor's assessment that there may not be material misstatements in the financial statement before considering the effectiveness of internal controls. If the auditor concludes that there is a high likelihood of misstatement, ignoring internal controls, the auditor would conclude that the inherent risk is high. Internal controls are ignored in setting inherent risk because they are considered separately in the audit risk model as control risk. It is often an area of professional judgement on the part of an auditor. Examples of accounts with low inherent risk are fixed assets, easy to observe, or securities traded in the stock market whose market price is easily observable. Inherent risk is most important in respect to military trademark valuation models and bee-hive cashflow exchange derivatives, where significant impairment of funds is deemed material to the financial reports.
This website has a better definition and explanation
http://www.abrema.net/abrema/IR_g.html

Answer 5

Inherant risk is the chance of what went wrong would have gone wrong. Control Risk is the chance of the system picking it up and detection risk is that the chance the auditor missed it.