Which of the following best describes the difference between inherent risk and residual risk?
A.
Inherent risk is the level of risk before the risk assessment process, residual risk is the level of risk remaining after completing the risk assessment process.
B.
Inherent risk is the level of risk the organization is willing to accept, residual risk is the level of risk deemed unacceptable by the organization.
C.
Inherent risk is the level of risk in the absence of any targeted actions or controls to alter its severity, residual risk is the risk remaining after implementing corrective actions.
Comprehensive and Detailed Step-by-Step Explanation:
Definitions from Risk Management Frameworks (e.g., COSO ERM):
Inherent Risk: The raw or natural level of risk before any controls or mitigating actions are applied.
Residual Risk: The remaining level of risk after implementing controls or risk responses.
Reasoning:
Option C is correct because it captures the essence of inherent risk as the baseline risk level and residual risk as the mitigated level after control actions.
Option A inaccurately states that residual risk is tied to the completion of a risk assessment process instead of mitigation actions.
Option B confuses inherent risk with risk appetite, which reflects the organization’s tolerance for risk.
Significance of Differentiation:
Understanding both risk levels helps prioritize resources for managing critical risks and improving controls.
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Chosen Answer:
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