Final answer:
Inherent risk is about the possibility of a material misstatement in financial reporting before taking into account any internal controls. Option (d) correctly defines inherent risk as it pertains to the chance of such errors in financial statements within the field of auditing.
Step-by-step explanation:
The concept of inherent risk in the context of auditing refers to the susceptibility of an account or transaction to a material misstatement, assuming no related internal controls are in place. It is a risk present due to the nature of the business or the nature of the transaction itself, without regard to any internal control mechanisms. Among the options provided, the one that best describes inherent risk is (d) The possibility that a material misstatement will occur in any given account before considering internal control.
This concept is crucial in audit planning as it helps auditors determine the nature, timing, and extent of their auditing procedures. Higher inherent risk areas require more audit attention and extensive testing because there is a greater chance that a material misstatement could occur. Auditors assess inherent risk to identify accounts at risk and tailor their audit approach to appropriately address these risks.
Inherent risk is the likelihood that an account or transaction will contain a material misstatement before considering the effectiveness of internal controls. Choice (d) accurately captures this definition.