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Risk Management

Strategies for Digital Risk Protection

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No lock has ever been invented that was completely secure; if an intruder is determined to get in, he or she can usually find a way.

So it is for houses and buildings – and the same principle is just as true for cybersecurity. Hence cybersecurity risk management is crucial to prevent and mitigate cyber threats.

To combat those threats, businesses need to develop digital risk management. We can define that as the processes used to assess, monitor, and treat the risks that arise from the digital business processes that are so common today. More specifically, within digital risk management are the active measures that businesses can take to protect their assets: digital risk protection.

What is Digital Risk Protection?

Digital risk protection (DRP) refers to cybersecurity measures that aim to prevent data breaches, malware, identity theft, and other forms of cyber crime. DRP is the active piece of the cybersecurity puzzle, and is an imperative for every organization.
DRP generally addresses external threats and internal dangers.

Digital risk protection solutions are critical for today’s security teams and risk management processes- especially when the average cost of a data breach now tops $4.2 million, according to the 2021 Verizon Data Breach Investigations Report.

Many firms opt to add a DRP solution to their existing cybersecurity stack rather than replace existing solutions entirely, because digital risk protection is a relatively new cybersecurity category.

Why is Digital Risk Protection Important?

No enterprise can thrive without being online in some form. Each new online connection, however, increases an organization’s attack surface, making it more likely that the company will be hacked. Some steps that are wise from a business development perspective, but also increase inherent cybersecurity risk:

  • Moving retail to the cloud to enable seamless omni-channel shopping;
  • Hiring and managing personnel using a human resources application;
  • Enabling application developers to collaborate online;
  • Collecting payments using a third-party processor;
  • Automating factories using the Internet of things (IoT);
  • Marketing and advertising on social media sites.

Digital connections are essential. Without them, your organization won’t be able to keep its critical business functions running smoothly. At the same time, it’s imperative to have measures in place to comply with a growing roster of cybersecurity standards, privacy laws, and regulations to protect your customers and your brand.

Common Types of Digital Risk

To make digital risk protection easier, you must consider a few common digital threats that organizations should aim to avoid.

Every type of digital risk affects cybersecurity. Because these risks occur throughout the digital landscape, disruptions in one kind of risk could have repercussions in others.

Data Leakage

A data leak exposes sensitive information that could become a data breach. When organizations or their vendors accidentally leak their data, they are at a higher risk of a data breach. As a result, a data leakage security solution must track data leaking inside and outside the vendor network.

Third-Party Risk

This refers to all risks introduced by service providers and third parties working with your enterprise. This could include data breaches, intellectual property theft, and financial data theft.

Technology

Any hazards associated with cloud architectural changes, the use of new platforms such as IoT devices, or new IT systems can lead to digital risk.

Compliance

Digital risks can be associated with non-compliance with regulatory requirements. These risks are often introduced with the adoption of new technologies or the addition of vendors operating in highly regulated industries.

Process Automation

Compatibility difficulties are risks that develop when automated procedures are adjusted. Process automation risks may occur due to initiatives to improve customer service or thanks to new business models.

Data Privacy

Any threat to the security of sensitive data is considered a data security risk – for example, personally identifiable information or financial data left exposed to public view online.

How to Create a Digital Risk Protection Program

Digital risk protection is a cyber risk management strategy consisting of two main components: Identifying risks and threats, and then mitigating them.

Identification

Identification includes the following steps:

  • Inventory all digital assets, including computers, network and data center equipment, servers, software, and mobile devices.
  • Map the organization’s complete digital footprint, linking digital assets to IP addresses, applications, social media sites, third-party vendors, temporary development and quality assurance environments, email accounts, and any other digital channels that hackers could exploit.
  • Restrict employees from downloading non-approved applications (also known as “shadow IT”) to organizational devices.
  • List the potential risks, including third-party and internal and external threats to all these assets and internet-facing services.
  • Monitor and collect real-time threat intelligence on the following:
    • Attack indicators. Signs that your organization was a victim of a cybersecurity attack, data found online or in the dark web, login attempts, fake social media accounts, scams posing as coming from your organization (which can be a precursor to customer phishing), and other anomalies including social engineering.
    • Data loss or leaks. Found in unauthorized database postings or the dark web, online postings of sensitive data or documents, and data breach attempts or incidents.
    • Vulnerabilities. Which areas in your systems and networks expose you to attack or malware? Examples are expired security socket layer (SSL) certificates, open ports, and inadequately secured login pages. Employees with access to sensitive information can also pose risks, especially if disgruntled or poorly trained.

Mitigation

Mitigation involves putting controls or mechanisms in place to reduce your risk of cyber attack and to hinder the success of an attack should it occur. This is the digital equivalent of hiding your valuables out of sight to avoid attracting thieves. You would also take measures to install locks, cameras, and other safeguards as extra precautions to deter their efforts.

In cybersecurity, a variety of controls protect your systems and networks. Identity access management (IAM) establishes who can access sensitive data. Security policies protect data by requiring the developer environment to be separate from the production environment. Anti-malware and anti-virus software are valuable tools to safeguard systems from cyber threats.

How do you know which mitigation measures to implement? Frameworks for risk management and cybersecurity can be great resources; they provide lists of suggested controls and other mitigation techniques helpful for your DRP program. These frameworks include:

Automate Your Digital Risk Protection Program with ZenGRC

The work of identifying, monitoring, and mitigating cyber risk is complex and time-consuming. Since criminals work around the clock, there’s no time for your security team to rest. A comprehensive digital risk protection solution is imperative, along with automated security tools, to streamline processes.

ZenGRC helps you identify, monitor, manage, and mitigate risks to your organization. Templates guide you through the risk assessment process to help you understand your risk landscape and prioritize mitigation activities.

Workflow management features offer easy tracking, automated reminders, and audit trails. The ZenGRC feature enables integration with popular tools such as Jira, ServiceNow, and Slack, assuring seamless adoption within your enterprise.
Insightful reporting and dashboards provide visibility to gaps and high-risk areas. By better understanding your risk landscape, you can take action to protect your business from cyberattacks, avoid costly data breaches, and monitor the security posture of your supply chain.

Worry-free digital risk, cybersecurity, and compliance management that frees you to focus on your business and bottom line: That’s the Zen way. Schedule a demo today!

Risk Assessment vs Risk Analysis

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Although people often use the words “assess” and “analyze” interchangeably, the terms are not synonymous in risk management. Each one has a specific meaning, and the distinction between the two is important.

A risk assessment forms the backbone of your overall risk management plan. A risk analysis is one piece of the assessment process, where you determine the likelihood and criticality of each risk, and then assign each risk a score based on your findings. Just as we explain in our article on risk appetite versus risk tolerance, these are relevant terms you should review.

What is Risk?

Business risk is a threat to a company’s ability to meet its objectives. Put another way, risk refers to the fact that an organization’s ambitions may not work out as planned or that its objectives might go unmet.

Risks are not always the fault of the business. Risk can be affected by numerous external factors, including natural disasters, global pandemics, raw material prices, increased levels of competition, or changes to current government regulations.

What Is a Risk Assessment?

A risk assessment evaluates all the potential risks to your organization’s ability to do business. These include project risks, enterprise risks, control risks, and inherent risks.

A risk assessment consists of two main parts: risk identification and risk analysis. Each component comprises several necessary actions.

In security, risk assessments identify and analyze external and internal threats to enterprise data integrity, confidentiality, and availability. This includes potential threats to information systems, devices, applications, and networks. A risk analysis is conducted for each identified risk, and security controls are pinpointed to mitigate or avoid these threats.

Security risk assessment models typically involve these elements:

  • Identifying the organization’s critical technology assets as well as the sensitive data those devices create, store, or transmit;
  • Creating a risk profile for each asset;
  • Assessing cybersecurity risks for all critical assets;
  • Mapping all critical assets’ interconnections;
  • Prioritizing which assets to address after an IT security breach;
  • Developing a mitigation plan with security controls for each risk;
  • Preventing or minimizing attacks and vulnerabilities;
  • Monitoring risks, threats, and vulnerabilities on an ongoing basis.

Security risk assessments are essential not just for cybersecurity but also for regulatory compliance. For example, the Health Information Portability and Accountability Act (HIPAA) requires periodic security risk assessments.

In addition, the National Institute of Standards and Technology’s (NIST) Special Publication 800-53, Guide for Conducting Risk Assessments, provides a framework for the information security risk assessment process.

Many organizations use risk management and compliance software to help them manage all the tasks associated with risk assessment, analysis, and management.
Security risks aren’t the only type of risk that organizations face. Here are some others:

  • Financial risk
  • Audit risk
  • Credit risk
  • Compliance risk
  • Reputational risk
  • Competitive risk
  • Legal risk
  • Economic risk
  • Operational risk
  • Third-party risk
  • Quality risk

What is the Risk Assessment Process?

Risk assessment happens in four steps.

  1. Risk Identification

    Various types of hazards must be considered. Information security and cybersecurity risks often bubble to the top in a world connected with technology, uut you would be remiss if you only focused on technology-related risks. A risk register helps document and categorize the output from the risk identification process.

  2. Determine Who and What Could Be Affected

    After identifying hazards and risks, consider how they are harmful and the possible outcomes. For example, what kinds of damages or injuries could result? Do they harm regulatory compliance? Who is at risk: employees, customers, other stakeholders? Each risk may pose a single threat or be dangerous in more ways than one.

  3. Analyze Risks and Prevent Them

    After identifying the risks, it’s time to perform the risk analysis and develop action plans. Assess the risk probability and criticality. Implement controls and risk response plans to prevent and mitigate risk.

    You are not expected to eliminate all risks since this is often not feasible. You should, however, take measures proportionate to the level of risk. This means that risks presenting a higher threat must receive more comprehensive control measures than lower-risk hazards. A risk matrix helps prioritize which risks need immediate attention.

  4. Check the Risk Assessment

    Environments are ever-changing. Ensure risk assessments are reviewed periodically. They should always be inclusive of all potential risks and new risks.

What is a Risk Analysis?

Risk analysis is the phase where you’ll examine each identified risk and assign it a score using one of two types of the scoring system: quantitative or qualitative. These scores help you prioritize your risks so you know which ones to address first and the best ways to address them.

Quantitative scoring assigns specific dollar amounts to the risk factors under consideration.

  • What would be the cost to the organization if the risk were to happen? This is known as “single loss expectancy” (SLE).
  • How often should you expect the risk to happen? Once per year assigns an annual rate of occurrence (ARO) of 1; once every 10 years, and ARO of 0.1.

To calculate the financial risk in a given year, multiply the SLE by the ARO.
Qualitative scoring is more subjective and uses a risk assessment matrix that typically involves four factors:

  • Likelihood: What’s the probability of occurrence: the probability that the risk will happen?
  • Impact: If the risk event occurred, what is the impact of the risk? How much would it harm your project, function, or enterprise?
  • Velocity: How quickly would your project, function, or enterprise feel the impact?
  • Materialization: What’s the potential severity of the impact? To measure this score, add the impact and velocity scores and divide by 2.

You can use mitigations or controls to reduce a risk’s potential impact, velocity, and severity scores.

In the risk analysis phase, it’s also essential to determine your organization’s risk appetite and risk tolerance.

The COSO Enterprise Risk Management framework defines risk appetite as “the amount of risk, on a broad level, an organization is willing to accept in pursuit of stakeholder value.”

Risk tolerance, the framework states, “reflects the acceptable variation in outcomes related to specific performance measures linked to objectives the entity seeks to achieve.”

What is the Risk Analysis Process?

The risk analysis process entails the quantification of uncertainties. Estimating the potential impacts helps to develop the risk analysis framework. By employing risk analysis methods, action plans can be implemented to prevent, mitigate, or cope with risks.

  1. Identification and Quantification of Uncertainties

    The objective in risk analysis is to pinpoint each uncertainty point and measure its magnitude to the best of your knowledge. Identifying and quantifying uncertainties is a crucial step in risk analysis.

  2. Estimation of Their Potential Impact

    It is necessary to estimate the impact of the various uncertainties. For instance, you may be unable to forecast the exact demand for your company’s product; however, once you know our costs and margins, you can often estimate the impact on your net profit.
    Having done this, you can build a model that enables your organization to calculate the results for any given entry.

  3. Development of a Risk Analysis Framework

    Once you perform these steps, your risk analysis model is set up. This model will have unknown inputs, uncertain variables, assumptions, or inputs.
    The model computes the outcomes for any particular input set of values. In contrast to other models, a risk analysis model requires you to think in ranks: Given that the entries are unknown and have many different values, the results are uncertain and may take on a wide range of values.

  4. Formulation of Risk Management Actions

    Since a simulation of the risk management plan produces many potential values for the results you are interested in, it is essential to analyze the outcomes.
    For instance, we can synthesize the array of results using several types of statistics, such as the mean or median or the value at risk. Graphs and other risk management tools help visualize the results, such as frequency graphs and accumulated frequency graphs.

Identification: What’s involved?

You’ll need to use your imagination and envision worst-case scenarios for the risk identification phase, from natural disasters to economic ones.

What if a fire broke out in your building? What if someone stole your proprietary secrets? What if the economy crashed? What if ransomware locked your systems? What if a competitor undercuts your prices?

During the risk identification process, it’s essential to keep in mind that nobody can see into the future. New risks could emerge for which you have no plan (yet). Therefore, it’s also essential to keep your options open and your risk management process and program flexible. Plan to review your risk list regularly and establish contingency plans for new risks.

So What’s the Difference Between Risk Analysis and Assessment?

Risk assessment is considered the whole process where all types of risks are identified. Risk analysis is a step within the structure mentioned above, where each risk level is defined. Both are components within the larger whole known as risk management or risk evaluation.

It is essential to conduct various types of risk assessments to reveal all potential threats, whether they already exist or before they are generated.

It also generates a series of benefits such as avoiding data breaches, justifying the need for a cybersecurity program, cost-benefit analysis related to security risks, among others.

Prioritizing your Risks

Once you’ve assigned scores to your risks, you can categorize them according to their priority. For example, many enterprises allocate rankings of “high priority,” “medium priority,” or “low priority.”

High Priority

A ransomware attack, in which malicious actors use malware to lock you out of your systems and demand payment to restore your access, would fall under this category. So would a zero-day attack, in which hackers exploit a previously unknown vulnerability.

Medium Priority

A medium-risk event might be a former employee stealing information after being terminated. Reviewing your organization’s employee-access policies would be a control against this risk’s materializing. A robust employee termination process coordinated between human resources and IT would help mitigate this risk.

Low Priority

If your buildings are adequately secured, the probability might be low of someone’s breaking into your offices and stealing devices. If those devices don’t contain any information, the likelihood of a data loss may also be low or nil. Since there is no urgency associated with this risk, you might decide to review your device-risk-mitigation controls annually.

Manage Risk with ZenGRC

Keeping track of everything all at once and all the time can seem impossible, especially for cyber risk. Threat actors continually switch and evolve their tactics and technologies – and so must you, or risk losing control of your systems, data, and brand.

Instead of using spreadsheets for your risk management strategies, adopt ZenGRC to streamline evidence and audit management for all of your compliance frameworks. ZenGRCs risk and workflow management software is intuitive and simple to use.

ZenGRC helps you pinpoint risks by probing your systems and finding cybersecurity and compliance gaps. Then, it enables you to prioritize those risks and assign tasks to your team members. The user-friendly dashboards let you see the status of each risk and what needs to be done to address it.

Workflow management features offer easy tracking, automated reminders, and audit trails. The ZenGRC feature enables integration with popular tools, such as Jira, ServiceNow, and Slack, ensuring seamless adoption within your enterprise.
With ZenGRC, risk management takes care of itself – leaving you to other, more pressing concerns, like boosting your business and your bottom line.

Worry-free GRC is the Zen way. Schedule a demo now for your free consultation.

What is Internal Control in Auditing?

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A system of internal controls is a set of policies and procedures that an organization can use to provide reasonable assurance that the organization achieves its objectives and goals. Generally, these controls include segregation of duties, limiting access to cash or sensitive data, management reviews and approval, and reconciliations.

A company’s internal audit function assesses the effectiveness of its internal control system through internal audits. The board’s audit committee assesses whether the controls are appropriately designed, implemented, and working as intended. Typically the ultimate objective of an internal audit is to prepare for an external audit.

External auditors have an independent perspective when evaluating an organization’s control environment and control processes. The auditor’s report states an opinion about the strength of internal controls and makes recommendations for improving any substandard controls. The organization should then resolve the findings and implement corrective actions within a timely manner.

Effective internal controls and periodic auditing are crucial to verify the reliability of financial reporting and confirm compliance with laws and regulations. In addition, organizations can leverage a robust system of internal controls to improve operational efficiency and reinforce ethical values.

What Are Internal Controls?

The auditing profession generally uses the Committee of Sponsoring Organizations (COSO) framework known as the Internal Control-Integrated Framework (COSO framework) to provide a definition of internal control.

According to the COSO internal controls framework, the internal control system is driven by an organization’s board of directors and senior management, designed to provide reasonable assurance for the achievement of objectives in:

  • Effectiveness and efficiency of operations;
  • Reliability of financial reporting;
  • Compliance with applicable laws and regulations.

For example, internal control and compliance audits for financial services firms can determine whether those firms are complying with the regulatory requirements of various laws and agencies, such as the Bank Secrecy Act.

Why Are Internal Controls Important?

Internal controls are important to preventing and mitigating risk events. They protect your company’s ability to maintain operations should an event occur. There are three kinds of internal controls: preventive controls, detective controls, and corrective controls.

Preventive internal controls are ideal because they stop errors and problems from happening in the first place. Segregation of duties reduces fraud risk by assuring that no single person has too much power in an organization. Many applications have preventative controls built into forms, such as only allowing numeric values in a field for phone numbers.

Detective controls identify errors and problems after those issues have occurred but before they have caused severe damage. Internal audits, reviews, reconciliations, financial reporting, financial statements, and physical inventory counts are all examples of detective controls.

Corrective controls are implemented to fix problems found by detective controls. Potential corrective actions include employee discipline, software patches, updated policies, and new preventative controls. A short-term corrective action may resolve the immediate issue, and then another long-term corrective action may be put in place to avoid future occurrences.

five components of internal controls in auditing

What Are the Five Components of Internal Control?

As described in the COSO framework, an internal controls system consists of five components.

Control Environment

The board of directors and top management build the culture and set the tone from the top for the company, which other employees are then expected to follow. The control environment is vital because it supports the other components of internal control.

Risk Assessment

Periodic risk assessments identify and analyze relevant risks that affect an organization’s ability to achieve its goals and objectives. The assessment’s results form the basis for determining where internal controls must be prioritized and implemented.

Information and Communication

Systems and processes must effectively support identifying, capturing, and exchanging information in a manner and time horizon that enables people to do their jobs. If information does not flow smoothly, employees may try to avert internal controls to simplify workflows.

Control Activities

These are policies and procedures enforced to assure management’s directives are carried out.

Monitoring

Continuous monitoring and audits verify that internal controls are performing as expected over time.

What Are the Limitations of Internal Controls?

When implementing internal controls, keep in mind some limitations that can undermine the effectiveness of internal controls.

Collusion

Segregation of duties is one of the most common internal controls that businesses use, so that no single employee has enough power to commit fraud. Employees can, however, get past this by collaborating together in an elaborate process to disguise their fraud.

Human Error

Human error can be another disadvantage of internal controls, especially when relying on manual processes and judgment calls. For example, mistakes can be made during manual inventory counts, and poor judgment could skew internal audit results. Wherever possible, automated systems should be employed to drive consistency and reduce human error.

For example, scales can be used in stockrooms to verify inventory counts. Automated systems can help perform reconciliations among accounting and financial records. Solid auditing processes, along with management oversight, will support rigorous internal auditing standards.

Unforeseen Circumstances

Internal controls rely on a company’s management anticipating all potential hazards and implementing mechanisms to prevent or mitigate them. Still, management cannot anticipate all potential challenges or events. Random variables or occurrences are prone to render internal controls ineffective.

Moreover, attempting to control unusual conditions can be costly, and a management team may instead choose to accept the risk. As a result, internal controls may be limited in their use under certain circumstances.

How Do Auditors Assess Internal Controls?

Internal and external auditors periodically examine the structure and performance of accounting controls and control activities related to other business processes, depending on the type of audit. Audits also vary based on the organization’s size, complexity, and nature of its business.

To evaluate an organization’s components of internal controls, the auditor uses various techniques to verify compliance with the respective framework.

Inspection

The auditor reviews transactions and reports to assure that all requirements are fulfilled.

Observation

The auditor watches personnel to assure that employees carry out their duties following the applicable control procedures and policies.

Confirmation

The auditor will validate that financial reporting and account balances match internal financial statements, to assess the risk of material misstatements. Auditors will evaluate control activities linked to the fraud risk and security controls over journal entries, such as odd transactions, distribution of money, or modifications.

Re-Calculation

In some cases, an auditor will re-calculate figures to verify accuracy and cross-check the business’s financial information.

Re-Performance

When examining business processes, an auditor will “re-perform” that process according to its proper steps, to assure that results are genuine and repeatable.

Improve Your Internal Controls with ZenComply

Managing internal controls is a necessary but arduous duty. Keeping track of risk assessments, procedures, metrics, audit records, and communication can be overwhelming.

Small companies may begin by managing their controls with spreadsheets, but this becomes unrealistic as their business grows and internal and external stakeholders increase. Companies need a scalable solution to help them adapt as their business changes.

Reciprocity ZenComply streamlines evidence and audit management for all of your quality and compliance frameworks. In addition, the risk assessment modules in ZenComply can provide substantial insight into where your documentation is lacking, allowing you to take prompt action to acquire the necessary evidence.

It is a single source of truth that ensures your organization is always audit-ready. Policies and procedures are revision-controlled and easy to find in the document repository. Workflow management features offer easy tracking, automated reminders, and audit trails. Insightful reporting and dashboards provide visibility to gaps and high-risk areas.

Schedule a demo now to discover how we help companies simplify, automate, and strengthen internal controls – The Zen way!

Why Is Cybersecurity Important?

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Phishing schemes, ransomware attacks, privacy breaches, and other cyber threats all aim to pilfer the sensitive data stored on your IT systems. These nightmares threaten your business, financial standing, and your reputation. They also threaten all businesses, large or small, in any industry.

The discipline of protecting business systems and sensitive data against digital assaults is known as cybersecurity. Cybersecurity measures, often known as information technology (IT) security, protect networked systems and applications from attacks inside or outside a business.

A comprehensive cybersecurity plan employs many layers of protection scattered throughout the computers, networks, apps, or data that must be safeguarded. To defend against cyberattacks, an organization’s people, processes, and technology must operate together.

With a practical cybersecurity framework in place and regular internal cybersecurity audits, you can significantly improve your company’s protection against these threats. Cybersecurity can be divided into five categories:

  • Security of critical infrastructure
  • Application security
  • Network security
  • Cloud security
  • Security for the Internet of things (IoT)

To cover all bases, businesses should establish a detailed strategy that incorporates various kinds of cybersecurity and the three components that play a role in a cybersecurity posture: people, processes, and technology.

Why Cybersecurity Matters

The importance of cybersecurity grows as our dependence on technology grows.

The truth is that whether you are a person, a small business, or a major global corporation, you rely on computer systems every day. When we combine this with the development of cloud services, inadequate cloud service security, smartphones, and IoT, we have a plethora of possible security vulnerabilities that did not exist just a few decades ago.

The European Union’s General Data Protection Regulation is an excellent example of governments getting involved in fighting cybercrime and protecting their citizens. The GDPR aims to reduce the likelihood and harm of data breaches by requiring all firms operating in the EU to:

  • Anonymize data
  • Require user permission to process personal data
  • Inform people about data breaches
  • Appoint a data protection officer

The tendency toward data protection is not restricted to Europe. While there are no national rules governing data breach disclosure in the United States, data breach laws exist in all 50 states. Among the similarities are:

  • The need to notify people affected as soon as feasible
  • Inform the government as soon as possible
  • Pay some form of penalty

What’s the Cost of a Cybersecurity Breach?

If you are lucky, the cost to the individual consumer is mainly an annoyance. Perhaps a new credit card must be issued to avoid identity theft, requiring updates to payment information on various billing accounts.

The cost to a major retailer or a healthcare provider, however, is measured in the millions. That includes state and federal fines if the business didn’t comply with data privacy laws and disclosure of privacy breaches.

Mavon Insurance compiled a list of some of the biggest payouts, settlements, and fines associated with cybercrime. In 2014, Home Depot paid $200 million to financial institutions and customers, plus state-issued penalties, when its point of sale system was breached. Uber paid $148 million in fines in 2016 when cybercriminals broke into its IT systems and stole data from riders and drivers. The penalty was because Uber didn’t follow reporting laws.

The loss of reputation and goodwill after a cyberattack lasts for a long time. Consumers avoid a retailer that was hacked because it didn’t have adequately updated cybersecurity measures.

According to IBM’s 2020 data breach report, the global average cost of a data breach was $3.86 million. The healthcare sector sat at the highest end, with an average of $7.13 million for each breach.

Let’s not forget that organizations that don’t implement data protection measures to protect customer data, intellectual property, or other sensitive information may lose their competitive edge over time by not being certified by any security compliance frameworks.

Who Needs to Think About Cybersecurity?

A cybersecurity threat may appear abstract and distant to many businesses and individuals. They believe that while others may be harmed, their product will be safe. That, however, is not the case.

The number and complexity of attacks and the costs of each breach continue to rise – not to mention the non-monetary costs of deterioration in your brand’s image. Nothing beats learning from experience, but in this case, learning from the experience of others is far superior to learning from your own.

It doesn’t matter whether you’re an individual, small company, or big enterprise; you’re still at risk of cyberattacks. Cybercrime and scams are on the rise, targeting anyone from banks to social media platforms, as well as big and small privately held companies.

For example, when Covid-19 emptied offices and sent employees to work from home in 2020, cybercriminals ramped up attacks on VPNs and other remote connections, which are especially vulnerable to security breaches.

2018 had more than 6,500 publicly disclosed data breaches. In 2020, according to TechRepublic, that number fell to 3,932 – but the number of exposed individual records grew by 141 percent, to 37 billion. Likely, centralized storage, cloud services, and slowly evolving cloud security contributed.

According to an IBM and Ponemon Institute analysis, the average cost of a data breach increased from $3.86 million to $4.24 million in 2021. When security breaches involve a third party, the financial damage jumps to an average cost of $4.33 million.

Cybersecurity professionals agree that run-of-the-mill antivirus software is no longer sufficient to assure network security, even for small businesses. So it’s time to invest in the best cybersecurity you can afford.

Why Has Cybersecurity Become So Important?

Many developments brought us to this place of increased cybersecurity risk, and that’s why it’s so important to take the matter seriously. New technologies such as machine learning and changes in how we use mobile devices are some of the reasons why common cybersecurity threats loom for companies of all sizes.

Here are some reasons why cyber threats are rampant, and cybercriminals are often successful:

More Sophisticated Cyber Attacks

Spyware, ransomware, and phishing scams have become quite good at breaching data security measures. Social engineering attacks have also become sophisticated. Artificial intelligence to flood servers and IT systems once a hacker is inside can lead to more damage, more quickly, after the malware is installed.

Increase of Hacking Tools

The availability of hacking tools and programs means that even unskilled hackers can successfully breach corporate computer systems. For example, ransomware software packages can now be purchased on the dark web, just like you’d buy a piece of ordinary software online.

The Internet of Things (IoT)

Estimates indicate that there will be 27.1 billion Internet-connected devices worldwide by 2022, and this figure will only grow with the proliferation of IoT. Unfortunately, cybercriminals can exploit IoT device vulnerabilities if those devices aren’t secured properly, hack into a company’s systems, and steal sensitive data.

Increase in Remote Work

The increase in remote workers has not always been reflected in a company’s risk assessment or risk management policies. In addition, remote work brings different security risks to businesses, which perhaps never before considered remote cyber security solutions.

The proliferation of free wi-fi access at stores, malls, and offices also demands a heightened level of IT security well beyond strong passwords. Mitigation methods such as multi-factor authentication must now be the norm to assure ongoing information security.

Improve Your Cybersecurity with Reciprocity ROAR

Managing hazards and adhering to industry rules is difficult in enterprise risk management, but implementing good governance, risk management, and compliance (GRC) solutions can make these activities more bearable.

It may appear overwhelming to keep up with the latest threats to your computer systems as your business grows and connects with contractors and other companies. Reciprocity ROAR’s integrated platform is an intuitive, easy-to-understand platform. It keeps track of changes to industry standards and regulations and alerts you to gaps.

Security policies, incident response procedures, and internal controls must be documented and updated regularly to assure that they meet the evolving cybersecurity environment. With Reciprocity ROAR’s document repository, policies and procedures are revision-controlled and easy to find.

Workflow management features offer easy tracking, automated reminders, and audit trails. The ZenConnect feature enables integration with popular tools, such as Jira, ServiceNow, and Slack, ensuring seamless adoption within your enterprise.

Insightful reporting and dashboards provide visibility to gaps and high-risk areas. By better understanding your risk landscape, you can take action to protect your business from cyberattacks, avoid costly data breaches, and monitor the security posture of your vendors.

Strengthen your cybersecurity posture by leveraging our single source of truth to highlight critical threats and vulnerabilities affecting your organization.

Worry-free compliance management is the Zen way. For more information on how Reciprocity ROAR can help you, contact us to schedule a demo.

What is Inherent Risk?

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All organizations in all industries face a certain amount of inherent risk. Inherent risk is the amount of risk that exists when some threat goes untreated or unaddressed. This also means that the less an organization tries to manage risk, the more inherent risk it has.

Auditors analyze inherent risk as part of their effort to assess the risk of material misstatement in financial reporting or the risk of non-compliance with regulatory obligations. They also analyze control risk, which is the risk that a control you put in place to reduce inherent risk won’t work. An understanding of inherent risk is crucial for organizations as they build systems of internal control to keep the organization’s risks at acceptable levels.

components of inherent risk in auditing

What Are the Components of Inherent Risk?

Inherent risk is an assessed level of raw or untreated risk. It is the natural level of risk inherent in a process before applying controls to prevent and mitigate the risk. Inherent risk should not be confused with residual risk. Residual risk is the level of risk that remains after implementing a set of controls to reduce the inherent risk.

Inherent risk has several components that auditors can use to identify potential risks, the probability of occurrence, and the potential impacts. These are:

Business Type

How the company conducts its day-to-day business operations is a primary factor for inherent risk. The amount of inherent risk increases if the organization displays an inability to adapt to external factors and cannot cope with a dynamic environment.

Execution of Data Processing

Data processing refers to a company’s capacity to use technology and computers to convert raw data into usable information. When a company uses weak IT infrastructure to drive and analyze data, that increases its inherent risk.

Complexity Level

This characteristic focuses on how a company records complicated transactions and operations. A company that performs highly complex work will usually also have a higher chance of completing the work improperly, increasing the amount of inherent risk.

For example, gathering information from multiple subsidiaries to report them at a single, globally level is a highly complicated task that may contain significant misstatements. That can drive up inherent risk.

Poor Management

Management that is oblivious to the everyday actions of employees can increase the levels of inherent risk. If leadership is not engaged, significant errors emerging from general operation of the business may be missed, giving rise to inherent risk.

Integrity of Management

Poor integrity of management is a decisive factor resulting in inherent risk. A senior management team pushing unethical business practices will continually degrade the organization’s reputation and its ability to meet regulatory compliance obligations, leading to a loss of business and raising the inherent risk.

Previous Results on Audits

If past audits were inadequate, discriminatory, or purposefully disregarded serious misstatements, such events might introduce inherent risk. These incidents or events tend to recur.

Transactions Among Related Parties

Transactions among related parties are likewise fraught with inherent risk because of the potential for conflicts of interest. Checks and balances are diminished, and there is an increased risk of misstatement in financial transactions or the risk of other regulatory compliance violations (say, corruption).

What Is Inherent Risk in Auditing?

Inherent risk in auditing is the risk of a material misstatement in financial statements because of something other than the failure of internal and related controls.

In addition, inherent risk is widespread in accounts with complex financial instruments or when leadership makes many approximate calculations or value judgments. As such, auditors will likely need to interview a company’s leaders about the estimation techniques to reduce errors.

When reviewing financial statements, an auditor uses inherent risk, control risk, and detection risk to assess the risk of material misstatement.

Audit Risk = Inherent Risk * Control Risk * Detection Risk

From this formula, it is also possible to identify the inherent risk formula as follows:

Inherent risk = Audit Risk / (Control Risk * Detection Risk)

The inherent risk can also be calculated by dividing the risk of a material misstatement by the control risk:

Inherent Risk = Risk of Material Misstatements / Control Risk

Accounting firms use this material misstatement risk assessment to develop audit procedures for the associated accounts.

The audit risk model determines the total risk associated with an audit and then describes the appropriate risk management strategies. Audit risk is the risk of error as auditors conduct an audit and develop their audit opinion.

Auditors use the audit risk model to manage the overall risk of an audit. An auditor first looks at the inherent risk and the control risk that is related to performing the audit, while at the same time learning about the organization and its culture.

If the auditor’s risk assessment determines that the inherent and control risks are high, then the auditor can set the detection risk to a lower level. A lower detection risk level will keep the audit’s overall risk reasonable.

For example, the auditor can increase the audit’s testing sample size to decrease the detection risk. On the other hand, if the auditor determines that inherent risk and control risk are low, he or she can set the detection risk higher.

Control Risk

This risk is due to the lack of internal controls or the failure of existing internal controls, resulting in material financial misstatements. The main difference between control and inherent risk lies in how the risk is assessed.

Control risks assess the risk after the risk controls have been applied. Here, auditors focus on the chance that the controls will fail or be insufficient to prevent the risk, rather than the likelihood of the initial risk occurring after it has been mitigated.

For example, there is a control risk of fraudulent behaviors if duties have not been sufficiently segregated. On the other hand, residual risk remains even if segregation of duties is implemented to a reasonable extent; a group of employees might collude to override internal controls. This is a tricky differentiation, so having experienced and objective auditors is valuable.

Detection Risk

This is the risk that the auditor won’t discover a material misstatement in the financial statements. An organization may desire to lower detection risks for sensitive financial figures and processes prone to errors. Detection risks can be reduced by increasing the audit frequency and sample sizes.

For example, an organization’s financial statements are audited by a Certified Public Accounting (CPA) firm. The firm’s accountants have previously worked with the company and highlighted concerns to top management about a lack of internal controls over the financial information within the payroll process.

The accounting firm will rate the control risk in this area as high going into this year’s audit. In addition, the company payroll system might be manual and complicated, requiring a significant amount of human input from the payroll clerk. These factors also raise the inherent risk.

Because both the inherent and the control risks are high, the detection risk – the chance of the auditor overlooking major issues – must be reduced substantially by increasing audit sampling and the rigor of auditing standards.

Examples of Inherent Risk

The volatile and ever-changing environment of the technology industry exhibits a broad example of inherent risk. Inherent risk will grow for a company that does not adapt to evolving market needs and develops new goods. As a result, technology companies have their own research and development departments to create new products and control inherent risk.

Another example can be found in the financial service industry if a company released an unaudited financial statement with forward-looking figures yet to be achieved. Management’s biases and judgment influence these forward-looking data. To limit the inherent risk, management must clearly warn stakeholders that these figures are only estimates.

Inherent risks also exist within the retail industry. With the rise of social media, organizations no longer have complete control over their messaging. A single unfavorable post online could be disastrous for your business. Given the vast number of client touchpoints, the inherent risk that your brand’s reputation (and revenue) could be harmed is rather significant.

Manage Inherent Risk with ZenRisk

As your business grows, you’ll find that your risk tolerance varies. After all, running a business is your job, and you may be bolder in certain areas now than you were a year ago. Still, keeping track of your inherent, control, detection, and residual risks may be too tricky for spreadsheets or traditional approaches.

That’s where Reciprocity ZenRisk can help you. ZenRisk can assist you in establishing, managing, and tracking your risk management framework and corrective tasks. The risk assessment modules in ZenRisk give significant insight into where your measures are lacking, enabling you to take immediate action.

Workflow management features offer easy tracking, automated reminders, and audit trails. The ZenConnect feature enables integration with popular tools, such as Jira, ServiceNow, and Slack, ensuring seamless adoption within your enterprise.

The platform provides an intuitive user experience mixed with extensive automation and analytics to further simplify the majority of the process.

Schedule a demo and get started on the path to worry-free risk management.