Going back to the basics in this post. I was having a discussion in office with some auditors and risk management professions and realised that not all Internal Auditors/risk guys really understand what Inherent risk is and also looked at Wikipedia and didn’t really find a good enough example for it.
Well when someone asks me to explain inherent risk I use the example of a road intersection. Inherent risk is risk of an accident happening at a road intersection when there is no traffic lights/signs or cops there (i.e. controls). The risk would be rated high if the intersection is really busy and it is almost certain that an accident would happen and the accident would result in a major pile-up.
Similarly the inherent risk would be low if the intersection is a small one which is not busy at all.
Will discuss residual risk in the next post.