Audit Risk Model: Inherent Risk
Inherent risk needs to be examined during the planning stage of the assurance event. Inherent risk is the likelihood that, because of the general trader environment, or nature of the trader’s business, an error of significance (i.e. a mis-declaration) might occur. Planning is the foundation of the risk assessment process, to focus officers on the critical areas of an audit.
Inherent risk may be broken down further:
- Financial stability: the ability of the trader to meet all debts / business viability
- Non-compliance: history of compliance / non-compliance
- Trader-related risks: type and size of trader, business
- Sector risks: Areas operated in, number of locations, complexity of excise duties, taxable supplies made.
- System-related risks: volume of data, complexity of computer systems and presence of validation checks, software packages used.