What does the risk assessment component of internal control establish?

The risk assessment component of internal control is designed to identify and analyze the various risks that could negatively impact the achievement of an organization’s objectives. It evaluates the relative risk levels of an entity's activities by considering factors such as potential threats, vulnerabilities, and the overall environment in which the organization operates. This assessment helps management understand the risks that could arise from different activities and provides a framework for making informed decisions on how to mitigate those risks effectively.

By establishing the relative risk levels, organizations can prioritize their responses and allocate resources appropriately to manage those risks. This focus on understanding and managing risk is essential for improving the organization's overall governance and accountability. It allows the entity to better safeguard its assets and enhance its operational effectiveness.