What is the difference between inherent risk and residual risk?

Understanding the difference between inherent risk and residual risk is fundamental in risk management. Inherent risk refers to the level of risk that exists in the absence of any controls or mitigation strategies. It is essentially the raw risk that an organization faces before any actions are taken to reduce it. On the other hand, residual risk is what remains after the organization has implemented its risk mitigation strategies and controls. It represents the level of risk that persists after these efforts.

Therefore, saying that inherent risk is the level of risk before any controls are applied, while residual risk is the risk that remains after those controls are in place, clearly captures the key distinction between the two concepts. This understanding is crucial for organizations as they assess their risk exposure and plan their risk management strategies. Knowing the inherent risk allows organizations to understand the potential maximum impact, while residual risk provides insight into the effectiveness of their risk management efforts.