Risk appetite is the amount and type of risk that an organization is willing to accept in pursuit of its objectives. Risk appetite provides the most important information to facilitate a risk response decision, because it reflects the organization’s risk tolerance, preferences, and expectations, which guide the selection and implementation of the risk response strategies. Risk appetite helps the organization to balance the potential benefits and costs of taking risks, and to align the risk management process with the organizational strategy and culture. The other options are not as important as risk appetite, because they do not indicate the organization’s desired level of risk exposure, but rather provide supplementary or partial information for the risk response decision, as explained below:
A. Audit findings are the results and recommendations of the internal or external audit activities that evaluate the effectiveness and efficiency of the organization’s governance, risk management, and control processes. Audit findings provide useful information to facilitate a risk response decision, because they can identify the gaps or weaknesses in the current risk response strategies, and suggest corrective actions or improvements. However, audit findings do not indicate the organization’s risk appetite, which is the basis for determining the optimal risk response strategies.
C. Key risk indicators (KRIs) are metrics that measure the impact and likelihood of the risks, and provide early warning signs of changes in the risk exposure. KRIs provide useful information to facilitate a risk response decision, because they can monitor and report the performance and effectiveness of the current risk response strategies, and trigger corrective actions or adjustments.However, KRIs do not indicate the organization’s risk appetite, which is the basis for determining the acceptable level of risk exposure and performance.
D. Industry best practices are the standards, norms, and expectations for risk management that are established and followed by the peers or competitors in the same industry or sector. Industry best practices provide useful information to facilitate a risk response decision, because they can benchmark and compare the organization’s risk response strategies with those of the leading or successful organizations, and identify areas for improvement or innovation. However, industry best practices do not indicate the organization’s risk appetite, which is the basis for determining the unique and customized risk response strategies that suit the organization’s needs and goals. References = Risk and Information Systems Control Study Manual, Chapter 2, Section 2.2.2, page 40. Risk Appetite: What It Is and How to Use It, Risk Appetite: How Hungry Are You?, Risk Appetite: The Strategic Balancing Act
