In the context of risk management, what does the term 'residual risk' refer to?

Residual risk is a fundamental concept in risk management that represents the amount of risk that remains after all the risk controls and mitigation strategies have been implemented. When organizations assess their risk landscape, they will typically identify potential risks and then put controls in place—such as policies, procedures, and other measures—to mitigate those risks. However, even after these controls are applied, there is often still a level of risk that cannot be completely eliminated, which is what is referred to as residual risk.

This concept is crucial for organizations as it helps them understand the extent of the risks that they still face despite their control measures. Effective risk management involves not only identifying and mitigating risks but also acknowledging and managing the residual risks to ensure they are within acceptable limits set by the organization.

In contrast, potential loss due to unidentified risks emphasizes risks that have not yet been identified and thus does not pertain to the managed risks that remain after controls. Similarly, the notion of risk that is acceptable to management pertains to risks that have been consciously accepted, while risk arising from the failure of controls refers specifically to instances where the implemented controls do not function as intended, rather than the residual state after controls have been applied.