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Which of the following best describes inherent risk?

The risk that a material misstatement could occur in the financial statements due to fraud or error, regardless of whether any related controls are functioning effectively.

The risk associated with the misapplication or failure of controls that could result in a material misstatement in the financial statements.

The risk arising from adverse business conditions or external events that may affect an entity's ability to achieve its objectives and execute its strategies.

The risk that arises from the susceptibility of an assertion to a material misstatement, either individually or when aggregated with other assertions, before considering internal controls.

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