This series of articles for ORR provides a comprehensive RCSA methodology, and an associated scenario analysis approach. Part II of the series explains how to construct the necessary risk metric Click here to download a pdf of this article. In our previous article we presented an intuitive, structured and powerful RCSA framework that empowers management to transparently identify and assess the firm’s risk exposures, and gauges the strength of the control activities put in place to manage them. To fulfill this premise, the RCSA framework needs to be complimented with defined objective criteria to assess the risks and controls consistently throughout the firm, reducing subjectivity and allowing comparison between inherent and residual risks on an equal scale. Extracting logical, consistent and meaningful quantitative conclusions about risk exposure and control effectiveness from ‘subjective’ RCSAs is challenging, but not insurmountable. In this series, the construction of a RCSA metric will be systematically explained by building upon the following concepts: 1) The relationship between inherent and residual risk; 2) A properly defined risk assessment scale; 3) Frequency and severity scales; 4) An appropriately developed control effectiveness scale; 5) The control portfolio, and control portfolio effectiveness; 6) Converting the RCSA metric into a meaningful numeric interval; and 7) Risk portfolio exposure. Items 1 through 5 will be covered in this article, while the remaining two will be explored in the final instalment of this series. Click here to read the first article in this series....
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