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

Kaveri Pharma Ltd's internal auditor is assessing the procurement function. Purchase volumes are very large, vendor selection is discretionary, and the approval limits are not documented. In risk-assessment terms, the susceptibility of this area to material misstatement or loss before considering any controls is called:

This is inherent risk, the susceptibility of an area to error or loss from its own nature, such as large volumes and discretionary decisions, before any internal controls are considered. Control risk concerns control failure, residual risk is what remains after controls, and detection risk relates to audit procedures.

  1. ADetection risk
  2. BResidual risk
  3. CControl risk
  4. DInherent riskCorrect

Explanation

Inherent risk is the exposure arising from the nature of the activity (high volume, discretion) before controls are considered. Control risk is the chance that controls fail to prevent or detect issues. Residual risk is what remains after controls, and detection risk relates to the auditor's procedures.

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