The risk added by financing is small and insignificant relative to the inherent risk in most...

Question:

The risk added by financing is small and insignificant relative to the inherent risk in most businesses. Is that statement true or false? Discuss.

Inherent Risk:

Inherent risk means the chances of defects and misleading information in the annual reports of the company and also that such defects are not captured in the audit. It reveals an untrue position of a company, which is ineffective.

Answer and Explanation:

The above statement is true.

The financial risk is small as it is based upon the debt acquiring the capacity of business and efficiency of the company in managing the cost of such external borrowings. Proper utilization of funds facilitates a company in managing financial risk, but the inherent risk is harmful to a business because the material information of the company is ignored in the presence of inherent risk. Also, the inherent risk may become a reason for the closure of the firm because of errors and defects in financial statements.


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Financial Risk: Types, Examples & Management Methods

from Finance 305: Risk Management

Chapter 1 / Lesson 4
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