What do you compare in a risk-level matrix when evaluating the elements of a risk?
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Having a clear picture of your company’s risk is critical to the world of internal controls, internal audit, ERM, and more. Show
Frankly, it's what helps risk professionals sleep better at night. However, many people feel lost when it comes to the intricate process of evaluating risks. Admittedly, there is a lot to factor in, with layers and layers of people and processes to consider. That's why the risk assessment matrix is such an important tool. The risk assessment matrix will help your organization identify and prioritize different risks, by estimating the probability of the risk occurring and how severe the impact would be if it were to happen. Planning, Managing and Addressing Internal Audit Risks Why use the risk assessment matrix?A risk assessment matrix is a common tool used by organizations of all sizes for three major reasons:
The risk assessment matrix can help identify risks at a widespread scope of a company—at the enterprise, business process, and individual process level. Check out the example of a risk assessment matrix below. This example shows the balance between having enough information for a good analysis without requiring an excessive level of detail. Get your PDF risk assessment matrix template!The risk assessment process in 4 stepsThe risk assessment process may seem like an intimidating process. But I’d like to offer a simplified view without a bunch of mathematical computations. The process:
Step 1: Identifying the risk universeThe goal with this first step is to capture the full scope of the present risk. To start off, you'll want to make sure you cast as wide a net as possible. The most effective way to do this is with free-flow brainstorming sessions. These brainstorming sessions will generate a list of ideas that will serve as the foundation of the risk assessment matrix. Now, let's get the creative juices flowing! From my own personal experience, I like to start with high-level risk categories that align to business functions, and then drill down to specific processes within those functions. This helps me narrow the focus down after a broad brainstorming session. Additionally, your risk universe will contain concerns specific to your industry, along with concerns unique to your company. Here's one way that I would organize my risks:
Step 2: Determining the risk criteriaBefore assessing each risk, you’ll want to develop a common set of factors to help evaluate your organization's risk universe. A typical risk assessment matrix uses two main criteria:
However, some organizations may add other factors such as vulnerability and speed of onset. This is a critical step, as these criteria will drive the discussions throughout the rest of the process. Beware of underestimating the importance of reaching consensus on the criteria. After all, you can’t manage what you can’t measure. Step 3: Assessing the risksThis next step is where things start to get fun. (Well, as fun as a risk assessment matrix can be.) We're going to assess the risks based on the criteria we laid out in the previous steps. If the identification step was qualitative in nature, this step includes a quantitative analysis of the most important risks. Most organizations use a common, three-part "High, Medium, and Low" scale at this stage, but taking a more granular approach could be beneficial to your organization—expanding the scale to "1–5," for instance. Step 4: Prioritizing the risksWe're almost there! In the last step, we're going to compare the different levels of risk (from step three) to the target risk criteria (from step two). In other words, prioritizing risk accounts for the impact, possibility, and importance of the risk, and outputs a plan. If these last two steps sound subjective—that's because they are. Expert judgment is involved in risk assessment and prioritization techniques to identify potential impacts, define inputs, and interpret the data. Remember: The risk assessment process should be done multiple times a year. The matrix should be changing consistently with your company's risk environment. Assessments that are only performed once a year, or not at all, have emerging risks that could go unnoticed, undetected, or may not even be considered. You know the risks—what now?Now that you have identified the risks, you now need to figure out what to do about them. And, as I mentioned in step four, that requires some expert judgement—some of which might not entirely be up to you. There are many ways to respond to risk, and each identified risk can be addressed in one of four ways.
Taking care of your risk assessment matrixAlways remember that the risk assessment matrix is a living, breathing document that needs to be nurtured and maintained. Risks are occurring all around us, and the matrix should reflect this. There are events that may trigger the need for a refresh, such as establishing an enterprise risk management (ERM) program, a major merger or acquisition, or a material weakness within your internal controls environment. With an airtight risk assessment process and matrix, you'll be equipped to heed any warning signs before they come to fruition. No more nightmares—try WorkivaNow that you have a clear picture of your company's risk, you don't have to let it keep you up at night. Workiva offers risk professionals up-to-the-second insight about what's on the horizon while minimizing the tedious manual data management—such as copying and pasting between documents—that you hate. See how it works for yourself. Schedule a demo now Editor's note: This blog post was originally published May 13, 2016, and has been updated. What does the risk assessment matrix compare?The risk matrix is based on two intersecting factors: the likelihood that the risk event will occur, and the potential impact that the risk event will have on the business. In other words, it's a tool that helps you visualize the probability vs. the severity of a potential risk.
What does risk matrix measure?More specifically a risk metric may be used to measure: The amount of exposure to a given risk or set of risks. The effectiveness of any controls that have been implemented to reduce or mitigate a given risk exposure. The performance of the risk management framework.
What are the 5 risk rating levels in the risk assessment matrix?The 5 risk rating levels under this component are as follows: Rare – unlikely to happen and/or have minor or negligible consequences. Unlikely – possible to happen and/or to have moderate consequences. Moderate – likely to happen and/or to have serious consequences.
What are 3 levels of risk used when measuring the impact of a risk?Analysing the level of risk
Level of risk is often described as low, medium, high or very high. It should be analysed in relation to what you are currently doing to control it. Keep in mind that control measures decrease the level of risk, but do not always eliminate it.
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