Inherent risk would have been very high in Enron. Inherent risk is the risk existed in company itself. As we discussed above, Enron's complex structure would have a high possibility that misstatements could occur. Its business relationships would also be an incentive that causes high inherent risk. At the same time, frequently use of financial instruments was the third reason. For example, it was sometimes quite confusing what should be recorded as revenue and what should be recognized as liabilities at a specific time.
Control risk was also very high in Enron. Top management was an important role in designing and implementing internal control system, which can reduce control risk. But, the fact was that, top management was the beneficiary of fraud behaviour. Then, how could the internal control system operate effectively in this situation?
High detection risk was also found in Enron. Because of the high possibility of inherent risk and control risk, it was even harder for auditors to detect problems in financial reports as well as in the companies' structure and internal control system. …
