Inherent risk is referred to as the risk that the auditor will fail in finding misstatements of material in relation with asserting the financial statements of an entity by testing and analysing substantively. It can be referred to as the risk to be concluded by the auditor that there is no presentation of materialistic errors when as a matter of fact there are. Inherent risk is among the three elements consisting of audit risk, and the other two are control risk and inherent risk.
Even though the auditor seems to be having no responsibility for performing and planning the audit for the inherence of immaterial misstatements, while differentiating the response of auditor for the inherence of misstatement that is highly dependent on if those misstatements are the key of fraud or error (Muniandy 2007).
When the auditor has been encountering the evidence of fraud potentially, irrespective of the materiality, the auditor needs to be considering each and every implication regarding the integrity of employees or management and the possible impact on each and every aspect of the audit. In this context, there seems to be an inverse relationship between considerations of materiality and the audit risk based on inherence. As a significant example, there can be a risk of relevant assertions in context with specific disclosure; class of transactions of specific account could be involved in misstatement by large margins, with actual value being extremely low. However, the risk of its misstatement by a very small value seems to be extremely high.