Mastering Internal Control Risk Assessment: Key steps to strengthen your business

As forward-thinking businesses focus on maximizing value, they recognize that risk must inform every decision, as it can enhance, maintain, or compromise value. However, instead of trying to eliminate or avoid risks entirely, they manage risk exposure to strike the right balance. 

Such an approach stems from the understanding that risk is a part of everyday operations, and there must be a way to take the right kinds of risks to drive value without crossing into dangerous territory. That’s where internal control risk assessments come into play.

These assessments help you understand your current position in terms of operational resilience and provide insight into what the future may hold. This blog will explore the importance of internal control risk assessments and the steps involved to manage exposure effectively and achieve your desired objectives.

Risk assessment as a component of the COSO framework

The COSO framework is often referred to in the context of discussing risk assessment for internal controls. The COSO internal control framework for internal controls is built around five interrelated concepts that enable organizations to achieve their overarching objectives:

Control environment: This component refers to the culture that sets the foundation for control activities, typically established through a top-down approach. The internal control environment must be guided by integrity and ethical values, management’s philosophy and operating style, organizational structure, and assignment of responsibilities.

Risk assessment: Risk assessment involves identifying risks that hinder the organization’s ability to achieve its goals. When assessing risks, the internal teams should also consider the potential for fraud and any changes that could impact the internal control system.

Control activities: Internal control activities are the policies, actions, and procedures that help mitigate identified risks. The framework advocates an authorization and approval process for these control activities and clearly segregates duties for implementation.

Information and communication: This framework component pertains to exchanging timely, accurate, and relevant information to enable people to carry out their responsibilities. This involves internal stakeholders and external parties such as customers, partners, and shareholders.

Monitoring activities: This component focuses on monitoring, measurement, and reporting control performance to provide valuable insights and report any internal control deficiencies.

Importance of risk assessment in internal controls

Internal control risk assessment is crucial to uncover blind spots and vulnerabilities in internal controls that attackers can exploit. It also supports the compliance and audit processes while providing a systematic approach to mitigate risks. Here’s why you need internal control risk assessments on a regular basis:

Identifies gaps and prioritizes risks

Quantitative and qualitative risk assessments help evaluate risks based on likelihood and impact. This allows organizations to strengthen their risk management strategy and work on controls that impact critical business functions. The prioritization helps allocate resources efficiently and address significant risks first.

Supports compliance

When you map controls to compliance requirements, risk assessments help identify whether the controls work as intended. Any compliance risks are identified and mitigating controls are finalized accordingly. Assessing relevant risks also supports compliance documentation requirements, especially for frameworks like ISO 27001 that mandate risk assessment and treatment plans.

Enhance control design/implementation

Risk assessments provide insights into control weaknesses or inadequacies. These insights enable organizations to enhance control design or improve implementation strategies to address potential issues upfront. Continuous improvements are also required for the controls to remain effective in the evolving landscape.

Types of internal control risks

When identifying risks, every organization faces different types of risks, some of which are related to the primary activities of the business, while others are related to non-core areas. These risks can be categorized into four types: technical, design, operational, and compliance risks.

Technical risks

Technical risks arise from issues related to the technical components of internal controls, including hardware and software problems. These risks impact the reliability and effectiveness of the technical infrastructure used to support controls. For example, an unpatched software vulnerability could create a risk of control failure, allowing unauthorized access or data breaches.

Design risks

Design risks occur when internal controls are not designed effectively to address the identified risks, regardless of their implementation. A design flaw can lead to inadequate protection or mitigation of the targeted risks. For instance, if a control meant to minimize unauthorized access only enforces multi-factor authentication for primary systems but not for backup systems, it introduces a design risk.

Operational risk

Operational risks arise from failures in the day-to-day operations or procedures associated with internal controls. This category includes risks from implementation lapses, monitoring failures, human errors, process inefficiencies, or external factors. For example, an operational risk could involve a compliance officer overlooking discrepancies in records due to a manual internal controls review process prone to human error.

Compliance risks

Compliance risks occur when an organization fails to adhere to internal policies or regulatory requirements, leading to potential fines, penalties, or legal consequences. For instance, if an organization subject to ISO 27001 does not implement the necessary controls for information security, it faces compliance risks related to non-conformance with the certification requirements.

Steps involved in internal control risk assessment

A well-structured risk assessment exercise allows internal teams to identify and prioritize risks better before proceeding with risk response. These are the 6 steps involved in internal control risk assessment:

Manual method:

Set objectives for risk assessment

Your risk assessment plan should have set objectives and a well-defined scope. The plan must specify the business units, departments, people, and processes that fall within the scope of review.

Answering the following questions will help here:

• What are the critical assets that must be protected?
• What could go wrong- the potential issues that can impact the company
• Which people and business processes are the most vulnerable?
• Are there any regulatory requirements? If yes, what is the current culture of compliance?
• What must go right for the entire organization to succeed?

Identify risks

The next step is collecting data from various sources to identify risks. You can conduct interviews, surveys, brainstorming sessions, and review previous incident records. For the departments identified in the scope, you can also ask some of these questions to identify risks:

• Are the business objectives, mission, and values of the unit explicitly communicated to the employees?
• What kind of information does the department rely on? Is It sensitive?
• Does the assessable unit have clearly defined roles and segregation of duties?
• What previous incidents have taken place in the unit? Were they properly documented?
• Are there contingency plans in place?
• Which processes are complex? Are they regulated?

Analyze these risks for likelihood and impact

Once you’ve identified the risks, analyze them for likelihood and impact. For quantitative risk analysis, create a risk matrix to assess the severity of each risk. This risk assessment method assigns numerical values to indicate risk criticality, with 1 representing the least risk and 10 representing the most significant risk.

Qualitative analysis, on the other hand, uses descriptive criteria and expert judgment to categorize risks as high, medium, or low.

You’ll also need to understand risk interactions, as risks never occur in isolation. A risk can compound, lead to new risks, and give rise to other risks. Prioritize risks that may lead to a cascading effect by triggering new risks.

Review and test existing controls

Next, the identified risks to existing controls should be mapped to determine whether these controls are adequate or if additional controls are necessary. For the controls already in place, conduct testing procedures to evaluate their effectiveness and assess whether they are robust enough to mitigate the identified risks. Run sample code scripts to observe control execution in real-time. Document your findings, including any areas for improvement, to guide the development of a tactical mitigation plan.

Create a mitigation plan for weaknesses

Start prioritizing internal control weaknesses based on urgency and impact. The mitigation plan will outline new controls that must be established and the control enhancements required for existing controls. It will also assign responsibilities for developing and implementing effective controls and enhancements. If there are any training gaps, workforce training will be conducted. All these actions will be documented and communicated to the stakeholders.

Implement and monitor

The changes will be implemented and monitored on an ongoing basis. Residual risk scores will provide a clear picture of control adequacy. Residual risk is calculated by subtracting control effectiveness from inherent risk—if the residual risk is low, the control in place is adequate. However, the risk assessment process should be continuously updated to align with the evolving risk profile and landscape.

Leverage automated solutions like Sprinto

With Sprinto, you can manage risks without managing spreadsheets.

Once you integrate your tech stack with the platform, you’ll benefit from integrated and proactive risk management.

• Sprinto enables you to access a comprehensive risk library to scope out security risks relevant to your business. You can also add custom risks based on your requirements.
• Next, it applies empirical rigor to your risk assessments and scores risks based on their likelihood of occurrence and impact.
• It also guides you on risk response strategies and you can accept, reject or transfer risks based on your preferences.
• Assign key risks to risk owners and decentralize control implementation to mitigate these risks.

The quick and automated process also enables you to get audit ready in weeks instead of months and assures you of accurate and reliable results.

Check out this video to learn how this is done:

Best practices for risk assessment

Here are some best practices for risk assessment of internal controls that experts swear by:

Use a recognized industry framework

Recognized compliance frameworks such as ISO 27005 and NIST RMF use proven and standardized methodologies for risk assessments. Adhering to these established frameworks can enhance the effectiveness and reliability of your risk assessment process and minimize any compliance-related risks.

Integrate risk assessment with SecOps

Integrating risk assessments with SecOps (security operations) contributes to streamlined workflows, better collaboration, and effective risk mitigation. The risk response is guided by high-impact risks, and security operations enhance mitigation to address priority vulnerabilities. In the long run, it contributes to a better security posture for the organization.

Conduct regular internal audits

Internal control audits play a crucial role in verifying the effectiveness of risk assessment methodologies and evaluating whether mitigation strategies are relevant and up-to-date. They help organizations keep pace with the evolving threat landscape, prepare for external audits, and support continuous improvement in risk management practices.

Use findings to guide incident response

Use the risk assessment findings to enhance incident detection capabilities by focusing on high-risk items. Implement the necessary controls to minimize risks and test response procedures. This approach helps enhance incident preparedness and ensures that the incident playbooks are aligned with the organization’s risk profiles.

Monitor and adjust risk profiles

An organization determines its risk tolerance and creates risk profiles based on the current status. However, it is crucial to continuously monitor the risk environment and adjust these risk profiles to reflect changes in risk exposure. This practice helps in making well-informed decisions and enables better resource allocation based on the most current risk information.

Also, understand internal control limitations that affect the business.

Manage risks unique to your business with Sprinto

As threat environments evolve, regular risk assessments must be paired with continuous tracking of internal controls to stay abreast of digital risks. Automated tools eliminate the scope of human errors in this exercise, enabling you to manage risks with precision. 

As a GRC tool, Sprinto ensures you never overlook a risk or accept more liability than required.

Sprinto helps you extensively with integrated risk management. But it goes beyond that—the platform also helps you establish a strong compliance program that continuously monitors controls, identifies anomalies, and triggers remediation workflows automatically. It also collects audit-grade evidence against each corrective action to help you breeze through your compliance audits.

200+ integrations and custom APIs connect people, processes, and technology and ensure zero blind spots.

Eliminate the risk and compliance chaos with Sprinto. Talk to an expert today and kickstart your journey.

FAQs

What is the assessment of internal controls?

Internal control assessment is the process of evaluating the design and implementation effectiveness of internal controls. The controls are tested to ensure that they can mitigate organizational risks and pinpoint any weaknesses to recommend improvements.

What is the difference between risk assessment and control assessment?

A risk assessment identifies potential risks that could impact an organization’s objectives and guide control implementation decisions. A control assessment on the other hand evaluates the effectiveness of controls to mitigate the identified risks.

What kind of risks are usually identified in internal control risk assessments?

Most risks identified during internal control risk assessments include fraud and misstatements, human errors, IT security risks, non-compliance and inefficiencies in operational processes.

What’s the difference between inherent and residual risk?

Inherent risk is the level of risk that exists before any controls have been implemented to mitigate it. Residual risk is the level of risk that remains after the controls have been implemented. The residual risk scores should be low to indicate the effectiveness of controls.

Who assesses internal controls?

Internal controls can be assessed by a variety of key groups, including internal audit teams, compliance officers, management, and the board of directors. Internal auditors and compliance teams typically conduct audits and risk assessments, while management and the board oversee the establishment, monitoring, and overall evaluation of these controls. Additionally, external auditors may assess internal controls during independent audits.