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CS Professional · Internal and Forensic Audit · Practices related to Internal Auditing

An internal auditor at Bharat Logistics Ltd rates the risk of inventory misstatement at a warehouse. Likelihood is high because stock counts were irregular, and impact is high because inventory is a large share of assets. A strong, tested system of physical verification exists. Which statement correctly describes the position?

Inherent risk is high, and effective controls reduce what remains as residual risk. Inherent risk is measured before considering controls, so existing controls do not make it low. Residual risk is normally lower than inherent risk when controls operate effectively, and controls are considered at planning.

  1. AInherent risk is high, and effective controls reduce the residual risk that remainsCorrect
  2. BInherent risk is low because controls exist
  3. CResidual risk is always higher than inherent risk
  4. DControl risk cannot be considered at the planning stage

Explanation

Inherent risk is the risk before considering controls, here high on likelihood and impact. Effective controls lower the exposure, leaving residual risk below inherent risk. Saying inherent risk is low because of controls mixes up inherent and residual risk.

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