Why is it critical to assess both inherent and residual risk?

Assessing both inherent and residual risk is essential for understanding the overall risk landscape within an organization. Inherent risk refers to the level of risk that exists in the absence of any controls. By evaluating this, organizations can identify vulnerabilities and understand the potential impact of various risks.

Residual risk, on the other hand, is the risk that remains after risk controls are implemented. Evaluating residual risk allows organizations to measure the effectiveness of those controls and determine whether they are adequate in mitigating risks. This process is critical for making informed decisions about risk management strategies and resource allocation.

By focusing on both inherent and residual risks, organizations can create a comprehensive risk profile that helps them understand where they stand in terms of risk exposure and the efficacy of their mitigation efforts. This understanding is crucial for continuous improvement in risk management practices and ensuring that any remaining risk is acceptable in the context of their organizational objectives and risk appetite.