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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Risk Management

Ganga Steels Ltd estimates a furnace failure risk has an inherent score of 20. Existing controls such as preventive maintenance reduce the exposure so that the board assesses the score as 8 after controls. What is the 8 called, and what should the board compare it with?

The score of 8 is residual risk, the exposure left after existing controls. The board should compare it with its risk appetite or tolerance to decide whether the remaining exposure is acceptable or needs further treatment, rather than just comparing it with the inherent score.

  1. AResidual risk, compared with the board's risk appetiteCorrect
  2. BInherent risk, compared with the previous year's profit
  3. CResidual risk, compared with the inherent score only
  4. DTarget risk, compared with the audit fee

Explanation

Risk remaining after considering existing controls is residual risk. The board compares it with its risk appetite or tolerance to decide whether further treatment is needed. Comparing it only with the inherent score shows control effectiveness but not acceptability.

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