Inherent risk is susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.
Inherent risk is the risk which an entity is exposed to due to nature of its transaction or industry in which the entity operates. For example cash balance in the balance sheet is inherently susceptible to misappropriation by employees or theft. Another example is multinational entity which is exposed to risk of exchange rates and difference in laws and regulations governing its operations in different jurisdiction.
Inherent risk is managed by entity management through designing and implementation of internal control system. for example for cash items the entity may have cash safe box and may ensure that there is segregation of duties in recording, custody and authorization of cash items.
The responsibility of auditor with regard to inherent risk is to assess it and plan accordingly in order to minimize overall audit risk to acceptably low level.