7A.2. Risk Identification and Assessment

Amit M. Mehta

Appendix 7A: Case Study—Developing a Multi-year, Risk-based Internal Audit Plan for a Retail Chain

7A.2. Risk Identification and Assessment

The tables below identify the top twenty-five risks faced by management. The risks are divided into the following categories:

Operational
Compliance
Financial
Technology

The list of risks was compiled after discussions with key members from the board of directors and senior management of Buy and Large, market research, prior period internal audit findings, and the latest industry trends.

Operational

Table: A description of the operational risks faced by Buy and Large and their impact on the company.
Risk	Description	Impact
Supply Chain Disruption	The decentralized purchasing system may lead to product unavailability and inconsistent quality across stores.	Affects brand consistency, customer satisfaction, and potential sales.
Market Dynamics	Over-reliance on specific marketing channels may lead to vulnerabilities if market preferences shift.	This could result in reduced market share and revenues if not addressed quickly.
Employee Turnover	High turnover could disrupt operations and increase training and hiring costs, especially among key personnel.	Affects operational continuity and incurs additional costs.
Inventory Mismanagement	Inefficient inventory management could lead to stockouts or overstocking, affecting sales and operational efficiency.	Direct impact on sales performance and financial health.
Supplier Dependence	Overdependence on specific suppliers could lead to vulnerabilities if supplier issues arise.	It could disrupt the supply chain and affect product availability and costs.
Strategic Misalignment	Tensions and disagreements within the board about strategic directions could lead to inconsistent corporate policies.	This could slow the decision-making processes and lead to missed market opportunities.
Inadequate Risk Management	Siloed risk management practices may lead to unaddressed systemic risks affecting the company broadly.	Inadequate preparation for systemic threats could lead to significant disruptions.
Damage to Brand Reputation	Negative public perception due to operational, ethical, or compliance failures could impact customer loyalty and sales.	Long-term sales decline and increased marketing costs to rebuild reputation.
Decline in Customer Satisfaction	Failing to maintain high levels of customer service could lead to reduced loyalty and sales.	Directly affects repeat business and profitability.
Gaps in Leadership Succession Planning	Lack of effective leadership development and succession planning could lead to disruptions when senior leaders leave.	Potential instability and loss of strategic direction
Dependency on Physical Stores	More reliance on physical stores could reduce competitiveness and market share as digital retail grows.	A potential long-term decline in foot traffic and sales.

Compliance

Table: A description of the compliance-related risks faced by Buy and Large and their impact on the company.
Risk	Description	Impact
Regulatory Compliance	Maintaining compliance with diverse local regulations can be challenging with operations across multiple regions.	Non-compliance can lead to fines, sanctions, and reputational damage.
Breaches in Ethical Standards	Pressure to meet targets may lead to decisions that skirt or violate company policies, affecting compliance and reputation.	Potential legal issues and loss of reputation.
Privacy Law Violations	Failure to comply with data protection regulations could lead to legal repercussions and damage to customer trust.	Legal penalties and damage to reputation, impacting customer relationships.
Health and Safety Incidents	Workplace accidents or safety breaches could cause harm to employees and lead to legal liabilities.	Financial implications from lawsuits and damage to employee morale and productivity.
Legal Disputes	Engagements in legal disputes could drain resources and affect operational focus.	Financial costs from legal fees, settlements, and potential operational disruptions.
Environmental Compliance Failures	Non-adherence to environmental standards could lead to fines and reputational damage.	Financial penalties and potential loss of customer trust in the brand.

Financial

Table: A description of the financial risks faced by Buy and Large and their impact on the company.
Risk	Description	Impact
Financial Misreporting	Errors in financial data consolidation and reporting could lead to inaccurate financial statements.	It could affect investor trust and lead to regulatory penalties.
Credit Risk	Non-payment or delayed payments from B2B clients could affect cash flow.	Direct impact on financial liquidity and planning.
Fraud and Theft	Incidents of fraud or theft within retail locations or at the corporate level could lead to significant financial losses.	Direct financial impact and potential reputational damage.
Economic Downturn	An economic downturn could reduce consumer spending, affecting sales across all categories.	Significant impact on profitability, possibly leading to downsizing.
Inflation and Cost Increases	Rising costs of goods and operational expenses due to inflation could erode profit margins.	Reduced profitability and potentially increased product prices affecting sales.

Technology

Table: A description of the technological risks faced by Buy and Large and their impact on the company.
Risk	Description	Impact
Cybersecurity Threats	Vulnerabilities in IT systems could lead to data breaches, affecting customer and corporate data.	Financial losses, legal consequences, and loss of customer trust.
Technology Infrastructure Failure	Failure to maintain robust technology infrastructure could lead to operational disruptions.	This can lead to a loss in sales, customer dissatisfaction, and operational delays.
Technological Obsolescence	Failure to keep up with technological advancements could lead to inefficiencies and competitive disadvantage.	This may result in losing sales and market share to more technologically advanced competitors.

Risk Prioritization

The table below demonstrates a risk prioritization exercise presenting the impact and likelihood of each of the twenty-five risks identified above (on a scale of 1 [lowest] to 3 [highest] along with supporting rationale).

Here’s the prioritized table of risks:

Table: Risks prioritized by the severity of their impact and the likelihood of their occurrence.
Risk Title and Description	Impact (Score/Rationale)	Likelihood (Score/Rationale)	Final Score Impact × Likelihood
Cybersecurity Threats Vulnerabilities in IT systems could lead to data breaches.	3 Financial losses and damage to trust can be significant.	3 Increasing cyber threats make this highly probable.	9
Regulatory Compliance Maintaining compliance across regions could be challenging.	3 Non-compliance can result in significant damage and penalties.	2 Diverse regulations increase the likelihood.	6
Supply Chain Disruption Inconsistencies in product availability and quality.	2 It can affect sales and customer satisfaction.	3 A decentralized system increases the probability of disruption.	6
Economic Downturn Could reduce consumer spending affecting sales.	3 Significant impact on profitability and sizing.	2 Economic cycles suggest a medium probability.	6
Financial Misreporting Errors could lead to inaccurate financial statements.	3 Impacts investor trust and regulatory compliance.	2 Complex systems increase the chances of error.	6
Privacy Law Violations Failure in data protection could lead to legal issues.	3 Legal penalties and reputational damage are high.	2 Increasing privacy concerns and laws heighten risks.	6
Brand Reputation Damage Negative public perception impacts sales and costs.	2 Long-term sales decline and marketing costs.	3 High sensitivity to public perception in retail.	6
Strategic Misalignment Disagreements could lead to inconsistent policies.	2 Could miss market opportunities.	2 Natural in diverse boards.	4
Market Dynamics Over-reliance on specific marketing channels could be risky.	2 This could lead to reduced market share and revenues.	2 Market shifts can be unpredictable.	4
Inflation and Cost Increases Rising costs could erode profit margins.	2 Impacts profitability and pricing.	2 Economic indicators show potential increases.	4
Employee Turnover High turnover disrupts operations and increases costs.	2 Affects operational continuity and costs.	2 Common in retail sectors.	4
Inventory Mismanagement This could lead to stockouts or overstocking.	2 Direct impact on sales performance.	2 Depends on the manager’s experience.	4
Breaches of Ethical Standards Decisions that skirt policies due to pressure to meet targets.	2 This could lead to legal issues and loss of reputation.	2 Pressure to meet targets can lead to risky decisions.	4
Failure of Technology Infrastructure Failures could disrupt operations.	2 Operational delays and sales losses.	2 Dependence on tech makes failures impactful.	4
Fraud and Theft This could lead to significant financial and reputational losses.	2 Financial and reputational impacts.	2 Retail environments are susceptible to these risks.	4
Health and Safety Incidents Workplace accidents could lead to liabilities.	2 Legal liabilities and damaged morale.	2 Safety risks are inherent in physical operations.	4
Legal Disputes Legal engagements could drain resources and focus.	2 Legal costs and operational disruptions.	2 Disputes are possible, given the scale of operations.	4
Environmental Compliance Failures Non-adherence to standards could lead to fines.	2 Financial penalties and loss of customer trust.	1 Depends on regulatory changes and enforcement.	2
Supplier Dependence Issues with critical suppliers could disrupt the supply chain.	1 Affects product availability and costs.	2 Dependence on a few suppliers increases this risk.	2
Decline in Customer Satisfaction Falling service levels could reduce loyalty and sales.	1 Impacts repeat business and profitability.	2 Variable depending on staff training and morale.	2
Technological Obsolescence Not keeping up with tech advancements.	1 Loss of competitive edge and market share.	2 Rapid tech evolution makes obsolescence likely.	2
Dependency on Physical Stores More reliance could lead to reduced competitiveness.	1 Long-term decline in foot traffic and sales.	2 Digital retail growth suggests a moderate probability.	2
Leadership Succession Gaps Lack of effective succession planning could disrupt operations.	1 Instability and loss of strategic direction.	2 It depends on the current leadership’s focus on succession planning.	2
Credit Risk Non-payment or delays from B2B clients affect cash flow.	1 Affects financial planning and liquidity.	1 Generally low given market segment and controls.	1
Inadequate Risk Management Siloed risk management leads to unaddressed systemic risks.	1 Lack of preparedness for systemic threats.	1 Systemic risks might be overlooked due to silos.	1

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Internal Auditing: A Practical Approach Copyright © 2024 by Amit M. Mehta is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.