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Difference between Residual Risk and Inherent Risk
We live in a world where danger lurks around every corner. We make it a habit to weigh the potential consequences of every decision we make in our life. Should we go through that light that's red? Should we put our money in that particular stock? These are possible dangers that might arise, and we keep an eye out for them every day. The same logic applies to the dangers that an organization faces. In point of fact, risks are the basic foundation upon which a company or organization is built. When it comes to risk assessment, businesses have to contend with two distinct kinds of danger − inherent risk and residual risk.
What is Inherent Risk?
As its name indicates, inherent risk refers to the level of risk that is dependent on the nature of the business that an organization does even in the absence of any security measures or controls being in place. The word refers to the possibility that you will arrive at an incorrect conclusion depending on the nature of the organization and the level of complexity it possesses. You disregard the question of whether or not the company in question has internal controls in place to assist in mitigating the inherent risk while doing this risk assessment.
Envision your digital internet presence in which there are no passwords, privacy or security measures to keep your secret and personal data safe; this is a perfect illustration of the inherent danger that is associated with the use of technology. Taking a flight is one example of an inherent risk you incur, and the danger associated with flying in an airplane is a very high-level risk.
What is Residual Risk?
The term "residue" refers to everything that is left behind after a component has been eliminated or separated from the process. It refers to a negligible quantity of the object that has been abandoned. A good example of a residue is the sooty stuff that is left over after putting out a fire. In a similar vein, residual risk refers to the amount of risk that is still there after taking all of the necessary safeguards and steps. It is the risk that remains after all other security measures and risk variables have been evaluated and accounted for. After all, attempts have been taken to identify and get rid of hazards, the residual risk is the risk that is connected with an action or process that is still present.
The term "residual risk" refers to any risk that persists after you have taken all reasonable precautions to reduce another risk and have exhausted all conceivable mitigation strategies. During the course of a business process, there are many risk factors involved, and the entity takes into consideration all of these risk factors in order to remove all of the hazards that are already known to be associated with the process. However, there are still a great many risks that cannot be protected against or hedged against since they are caused by unknown variables. These kinds of hazards are referred to as residual risks.
Difference between Residual Risk and Inherent Risk
The following table highlights the major differences between Residual Risk and Inherent Risk −
Characteristics | Residual Risk | Inherent Risk |
|---|---|---|
Meaning | After taking into account any controls
or risk treatments, the degree of risk
that is still there is referred to as the
residual risk. After taking into consideration all of the preventative steps and safety procedures, it refers to the level of risk that is still there. | Inherent risk is the risk that is
present in an organization simply
because of the nature of its
company, even if there are no
safety precautions or regulations
in place. In the realm of finance, the risk that is created by certain inaccuracies in financial statements without taking into consideration internal controls is referred to as inherent risk. |
Nature | The term "inherent risks" refers to
any and all risks that are formed only
after an organization has determined
its primary goals and has taken
measures to determine the potential
risks that can directly affect those
goals. In other words, inherent risks are risks that are established only after an organization has defined its primary goals. The essence of inherent risk is something that is always there in a business process, as the term says. | A concept, an item, a service, or a
venture can be described via the
use of a very quick and vocal
speech known as an elevator
pitch. A value proposition could be
included but in a condensed form. |
Conclusion
In a nutshell, the measure of a risk that exists before the implementation of any safeguards or controls designed to reduce it is referred to as the inherent risk. Once you have identified the risks that are associated with a particular business process or activity, you have not yet taken any actions to manage them. This is referred to as the score for inherent risk. It is the risk score that you must consider before taking any action.
Residual risk is the risk that is still there after appropriate control measures and measures have been taken into consideration. It is essential that the risk score should be lowered to a degree where it is lower than the risk that is intrinsic to the situation as a result of how you manage the risk.
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