Have you ever heard about control risk? If not this article is for you. Today we will talk about what is a controlled risk and what are the examples of controlled risk. Let’s find out by reading the article below.
What is a controlled risk?
Control risk is the likelihood that the financial statements will be materially misstated due to the failure of the controls used by the business. Businesses are more likely to experience unrecorded asset losses when there are significant control failures, meaning their financial statements may show profits when they are actually losses.
Business managers are responsible for designing, implementing and maintaining control systems adequate to prevent asset loss. Maintaining a reliable control system is not easy because the system must be changed periodically to accommodate ongoing changes in business processes, as well as to handle entirely new business transactions. In addition, management may deliberately avoid implementing certain controls on the grounds that they would be too costly to maintain or that they would interfere with the smooth flow of transactions affecting customers.
What are the examples of controlled risk?
Alex is an accountant for a small manufacturing company. Each quarter, he prepares the company's financial statements, taking special care to avoid potential misstatements and inaccurate information. The control procedures Alex follows include:
Assign the right responsibilities to the right people: Alex hates when everyone in the company does everything. He believes that segregation of duties is necessary so that tasks can be carried out effectively by the right people. So, he cross-checks responsibilities and makes sure they are assigned across the workforce based on each individual's skills, knowledge, and experience.
Handle Proper Documentation: Purchase orders or customer invoices are often lost in improper filing systems used by multiple parts of the company. Alex reviews the documents and makes sure they correspond to a particular purchase or sale. He then followed the document numbering system and created a related spreadsheet so that he could easily find all invalid documents on the spot. In the case of a missing invoice, Alex calls the company that originally issued the invoice and asks for a copy to keep in his financial records.
I hope this article will help you to learn what is a controlled risk and what are the examples of controlled risk. Monitoring controls is a key task of a company's internal audit department. When control issues are identified, they communicate these issues to management and the audit committee and make recommendations for improvement.
