Final answer:
Residual risk is the risk that remains after internal controls have been implemented in response to an identified threat or risk. These controls cannot eliminate all risks, so it's important for businesses to continuously monitor and decide if the residual risk is acceptable. This process is a key aspect of an effective risk management strategy.
Step-by-step explanation:
The phrase that completes the student's question is "residual risk". This term refers to the risk that remains after management has implemented internal controls in response to an identified threat or risk. It's crucial to understand that while internal controls are designed to manage and mitigate risks to an organization's objectives, they cannot eliminate all risk entirely. Therefore, residual risk is the exposure that still exists even after controls are in place.
For example, a company may implement strict cybersecurity measures to protect against data breaches. Despite such controls, there could still be a small chance of a breach due to unforeseen vulnerabilities. This represents the residual risk. It is important for businesses to assess residual risks regularly and decide whether they are within the acceptable tolerance levels for the company. If not, further action may be necessary to reduce the risk further.
It's part of the risk management process to continuously monitor and review the internal controls to ensure they are effective and to make adjustments when necessary. The process includes identifying risks, assessing their potential impact, designing and implementing controls, and then assessing what risk remains. The goal is to minimize the residual risk to a level that is acceptable to the organization without expending unreasonable resources.