The risk of loss due to fraud may be classified as which of the following types of risk?

• A. Interest rate risk
• B. Market risk
• C. Liquidity risk
• D. Inherent risk

Answer: (D)

Verified step by step guidance

1. Understand the concept of inherent risk: Inherent risk refers to the susceptibility of an account balance or class of transactions to material misstatement, assuming there are no related internal controls in place. It includes risks such as fraud or errors that are naturally present in financial reporting.
2. Differentiate between the types of risks mentioned: Interest rate risk relates to changes in interest rates affecting financial performance, market risk involves fluctuations in market prices, and liquidity risk pertains to the inability to meet short-term financial obligations. None of these directly address the risk of fraud.
3. Recognize that fraud is a natural risk in financial reporting: Fraud is an example of an inherent risk because it exists due to the nature of human behavior and the complexity of financial transactions, regardless of the controls implemented.
4. Connect the classification of fraud risk to inherent risk: Since inherent risk encompasses risks that exist before considering any mitigating controls, the risk of fraud is classified under inherent risk.
5. Conclude that the correct classification for the risk of loss due to fraud is inherent risk, as it aligns with the definition and scope of inherent risk in financial accounting.