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Risk Management: Inherent Risk and Residual Risk

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Define inherent risk and residual risk. Which of the two types of risk should have a greater impact on the annual internal audit plan?

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Solution Summary

This solution explains inherent risk and residual risk. I also explain which of the two types of risk should have a greater impact on the internal audit plan.

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An inherent risk in auditing is the risk that there are misstatements present on the financial statements without considering the internal controls that are in place. As an auditor, if I am informed that I need to audit a restaurant, which deals with large volumes of cash, the inherent risk would be knowing that fraud could be present without knowing ...

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