A risk control matrix is an essential element of a system that helps in managing the risks prevalent in any organization. Each organization is different on its basis of firms and so its risk environment too that depends on the factors like business type, size of an organization, resources that the organization use, and rules or regulation that they follow. Thus, in virtue of these emerging risks, Risk Control Matrix is an important tool to understand the organization’s risk profile and optimize accordingly.
Risk Control Matrix will help your organization identify and prioritize different risk, by estimating the probability of the risk occurring and how severe the impact would be if it were to happen. The process of Risk Control Matrix basically includes the following steps:
· Identify the risk universe.
· Determine the risk criteria.
· Assess the risks.
· Prioritize the risks.
Risk and Control Matrix (RACM) is a powerful tool that helps an organization identify, rank, and implement control measures to mitigate risks. A RACM is a repository of risks that pose a threat to an organization’s operations, as well as the controls in place to mitigate those risks. A risk matrix in simple words is a simple mechanism to increase the visibility of risks and assist management decision-making.
RACM simply serves an organization by risk profile, measuring the risks against the formalized actions and helps in taking preventive measures from the negative events that can happen.
As per the Section 143(3)(i) of the Companies act, 2013, the company’s internal financial control and operation’s effectiveness of such controls of companies and one person company (OPC) which has annual turnover of Rs 50Crores has to be reported by the auditors. Thus, here RCM play a major role in ensuring the implementation of Internal Financial Controls as prescribed by Companies Act, 2013.
Benefits of RACM for organizations
The process or exercise of documenting the environment of risks related to an organization provides valuable opportunity to consider the risk appetite and ensure the organization’s plan to mitigate risks.
It provides a roadmap during the planning and allows in managing the risk which needs to be addressed. An additional benefit that RACM provide to an external auditor is that they get more confidence in the control environment and reliability of the financial reporting.
RACM provides confidence to the senior management and the board on the overall control environment in the organization.
Limitations of Risk Matrices
Apart with providing several benefits to an organization, RACM also has some limitations that include:
They can correctly and unambiguously compare only a small fraction of randomly selected pairs of hazards and can assign identical ratings to quantitatively different risks.
CONCLUSION- By understanding the concept of Risk Control Matrix we can simply conclude its importance to an organization in optimizing its risk profile. It acts as a powerful tool to manage a risk environment and is beneficial in several ways to the organization, auditors, and even to the board. Therefore, it is essential to have an understanding of Risk Control Matrix so that any organization can take a sound and safe decisions in their business activities.