Define inherent risk.

Inherent risk refers to the level of risk that exists before any controls or mitigation strategies are implemented. It represents the natural exposure to risk due to the internal and external environment in which an entity operates, without considering the potential effectiveness of any risk management processes. This concept is crucial in risk assessment because it helps organizations understand the baseline level of risk they face.

By identifying inherent risk, organizations can determine the necessary controls that need to be put in place to reduce that risk to an acceptable level. It emphasizes the importance of recognizing risks based on the current state of operations and environmental factors, rather than the effects of processes designed to mitigate those risks. Understanding inherent risk is vital for effective risk management and decision-making.