Final answer:
Inherent risk is the risk present before any mitigation steps are taken by management. It is contrasted with residual risk, which is the risk remaining after controls are applied, and is closely related to risk appetite, the acceptable level of risk, and risk assessment, the process of evaluating risks.
Step-by-step explanation:
The risk that exists before management takes any steps to mitigate it is known as inherent risk. This type of risk is present in the environment in which a business operates and is a result of the existing conditions before any control measures are applied. For instance, a company that manufactures glassware inherently faces the risk of product breakage due to the fragile nature of its products. This risk exists even before the company implements packaging strategies to reduce potential damage during shipping.
Residual risk, on the other hand, is the remaining risk after management has taken action to reduce or eliminate inherent risk through control measures. The company's risk appetite is the level of risk that it is willing to accept in pursuit of its objectives, influencing how much risk management action is taken. Risk assessment is the process of identifying, analyzing, and evaluating the risks that an organization faces.