Inherent Risk is the susceptibility of a financial process to misstatement, without consideration of any compensating internal controls.

Definition

Involves complex calculations, significant judgment, use of estimates, potential future uncertainty , assets  susceptible to misappropriation, or management incentive to misstate financial reporting.

Involves relatively simple calculations, minimal judgment, and a limited risk of misappropriation of assets or financial misstatement.

Involves little to know professional judgement or estimates, and consists of  specific transaction prices which are not subject to potential uncertainty.

Control Effectiveness represents how effective the current internal controls in place within a financial process are expected to be in preventing a financial misstatement  from taking place or detecting it in a timely manner.

Scale

Definition

Factor

High

There are highly effective processes currently in place to mitigate the risk of potential errors, and no issues have been noted during the past three years.

0.4

Moderate

There are processes in place to address potential errors, but there have been one or more issues noted within the past three years.

0.6

Low

There are no processes currently in place to specifically address potential errors within the transaction cycle.

0.9

Control Effectiveness represents how effective the current internal controls in place within a financial process are expected to be in preventing a financial misstatement  from taking place or detecting it in a timely manner.

Scale

Definition

Factor

High

There are highly effective processes currently in place to mitigate the risk of potential errors, and no issues have been noted during the past three years.

0.4

Moderate

There are processes in place to address potential errors, but there have been one or more issues noted within the past three years.

0.6

Low

There are no processes currently in place to specifically address potential errors within the transaction cycle.

0.9