Question

How does inherent risk interact with residual risk when conducting a risk assessment in internal audit?

Answer 1

Ans: Inherent risks interact with residual risk when conducting a risk assessment in internal audit are the following:-

1. Risk Response – management designs risk response at various levels based on the analysis of the risk (impact and likelihood) and on the defined level of risk tolerance. The response typically includes the categories of acceptance, avoidance, reduction and sharing.

2. Establishment of controls – controls are typically established in those operations areas that are essential, and acceptance is too risky, and avoidance and sharing are not possible or practical.

3. Testing and Assessment of Internal Controls – to ensure that controls are operating efficiently, testing is usually necessary, particularly in automated processes. The testing provides confidence that controls have reduced risk to a tolerable level.

4. Corrective Action – corrective action is warranted when a control is weak, not in place, or not functioning properly. These actions are documented and added to the entity’s risk assessment plan with a timeline for action.