Question

A charitable organization relies for its funding on donations from the general public, which is
mainly in the form of cash collected in the streets by volunteers and cheques sent by post to the
charity’s head office. Wealthy individuals occasionally provide large donations, sometimes on
condition that the money is used for specific purpose.
The constitution of the charity specifies the purpose of the charity, and also states that no more
than 15% of the charity’s income each year may be spent on administration costs.
Required
Identify the inherent risks for this charitable organization that an auditor of its financial
statements would need to consider.

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Answer 1

Inherent risk means the risk that the financial statements may be materially misstated because of any reason other than failure of internal control. Inherent risk can not be controlled , it is inbuilt risk.

In the above question , as we can see that the charitable institution receives donations by cash also and cash receipts can be manipulated at the time of recording in the financial statements. Cash receipts can not be traced fully as we trace the bank receipts from external sources like bank statement.

hence there is inbuilt risk of misstatement of financial statements because of risky nature of cash receipts.