ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk
Orion Telecom's risk team notes that its inherent risk of regulatory fines is rated high likelihood and high impact. After new compliance controls are implemented, it re-rates the risk as low likelihood and medium impact. What does this re-rating represent?
The re-rated assessment is residual risk, the exposure that remains after management's controls have been taken into account. The original high-high rating was the inherent risk. Residual risk is then compared with risk appetite to decide whether further action is needed.
- AResidual risk, being the exposure remaining after the effect of controlsCorrect
- BInherent risk, being the exposure before any controls
- CRisk appetite, being the amount of risk the board is willing to take
- DSystematic risk, being risk that cannot be diversified
Explanation
Residual risk is what remains after controls and responses are applied. Inherent risk is the original pre-control rating. Risk appetite is a board preference, not an assessment of exposure.
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