What must be established to classify the severity of a risk?

To classify the severity of a risk, it is essential to establish risk tolerance levels. These levels define the acceptable amount of risk that an organization is willing to take in pursuit of its objectives. They provide a benchmark against which the severity of different risks can be measured. By establishing clear risk tolerance levels, organizations can effectively evaluate whether a specific risk is within acceptable limits or if it requires mitigation or further management.

Risk tolerance levels help prioritize risks based on their potential impact and likelihood, allowing organizations to focus their resources on managing the most significant threats to their objectives. This ensures a structured approach to risk management, enabling informed decision-making regarding risk treatments and organizational strategies.

Control effectiveness, inherent risk assessments, and risk reporting standards serve important roles in the overall risk management framework. Control effectiveness measures how well existing controls mitigate risks; inherent risk assessments evaluate risks without considering controls; and risk reporting standards ensure proper communication of risks within the organization. While these components are critical to a comprehensive risk management strategy, they do not directly classify the severity of risk, which is primarily guided by the established risk tolerance levels.