How Do I ... Gauge Business Risk

An entity-level risk assessment provides management the basis from which to make a range of decisions, such as determining internal audit coverage, insurance coverage, and overall risk tolerance. By recognizing and appreciating the potential impact of entitywide risks, an organization can select responses that align with its business objectives and risk appetite. Plus, findings from the assessment can be used for establishing the scope of internal audits, audit objectives, covered areas, internal control testing, or assistance with the independent financial auditors' work.

FOCUSING ON RISK

Entity risk assessment typically consists of a general, top-down process that focuses first on the most crucial entity-level risks — those risks posing the greatest threats to the organization. Each risk is assessed according to its likelihood and potential impact, which in turn helps determine risk severity and priority. Management can use this information to drill down to the risks affecting significant processes for the company's most crucial activities. Examples of entity-level risks include:

  • Identification and assessment of environmental exposures.
  • Expanding dependence on technology.
  • Increase in foreign activities.

Risk assessment is not a static activity: Internal and external events throughout the year present new risks and alter the likelihood and impact of previously identified risks.

ADDRESSING RISK

Risk assessment is essential for implementing any set of risk management and response efforts. The Committee of Sponsoring Organizations of the Treadway Commission's Enterprise Risk Management — Integrated Framework (COSO ERM), for example, includes Risk Assessment as one of its eight primary components. The remaining components are: Internal Environment, Objective Setting, Event Identification, Risk Response, Control Activities, Information and Communication, and Monitoring.

LONG-TERM BENEFITS

Risk assessment nurtures a variety of residual benefits. It enables organizations to evaluate strategic decisions based on their risk appetite, or the degree of risk they're willing to accept. Any number of strategies might achieve a corporate objective — assessing the risks associated with each option enables the organization to select the most appropriate strategy.

Effective risk assessment helps organizations become more responsive to change; reduces the chance of adverse, unreported events; and enhances transparency. By continually assessing risk, a company can not just survive, but thrive.

Adapted from "Gauging Business Risk" by Alyssa G. Martin (Internal Auditor, "Back to Basics," June 2006)


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Subscribe_June 2014