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Legitimate Interest under GDPR

Legitimate Interest under GDPR Legitimate interest is a legal basis under the General Data Protection Regulation (GDPR) that allows organizations to process personal data without explicit consent, provided they have a valid reason, and the processing does not override the individual's rights and freedoms ( Article 6(1)(f) ). Key Elements Legitimate interest is one of the six lawful bases for processing personal data under GDPR ( Article 6 ). It is broader and more flexible than other bases because it is not tied to a specific purpose, such as contractual or legal obligations. Common examples include fraud prevention, network security, direct marketing, and processing employee data (Recital 47 ). Three-Part Test Organizations must satisfy a three-part test to rely on legitimate interest: Purpose Test: Is there a legitimate interest behind the processing? (Recital 47 ) Necessity Test: Is the processing necessary to achi...
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Substantive testing

Substantive testing   is a key audit technique used to verify the accuracy, completeness, and validity of financial statements by detecting material errors or misstatements in accounts, transactions, and disclosures. Definition and Purpose Substantive testing involves detailed procedures where auditors gather evidence to determine whether financial statements are fairly presented and free of material misstatements. It supports an auditor’s opinion, provides assurance on the reliability of financial information, and helps detect errors or fraud. Types of Substantive Tests Analytical Procedures :  Compare financial data across periods and against expected trends to spot discrepancies. Tests of Details :  Examine individual transactions and account balances, including inspection of supporting documents, confirming amounts with external parties, and recalculating values. Key Activities Comparing year-end balances with prior periods. Performing ratio analyses and trend invest...
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Residual risk

  Residual risk   is the amount of risk that remains after an organization has applied all possible controls and mitigation measures to reduce inherent risk within its processes, activities, or systems. Definition Residual risk is the  leftover risk  after taking steps to manage, treat, or control an identified risk. It reflects the reality that no risk management strategy or control can fully eliminate every possible threat or vulnerability. Calculation The formula for residual risk is: Residual Risk=Inherent Risk− Impact of Risk Controls\text{ Residual Risk} = \text{Inherent Risk} - \text{Impact of Risk Controls} Residual Risk = Inheren t Risk − Impact of Risk Controls This means organizations first assess the inherent risk and then evaluate how much it has been reduced by the implemented controls. Examples Even after installing firewalls and anti-malware tools , a company still faces residual risk of cyberattack...
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Compliance risk

Compliance risk , also known as  integrity risk , refers to the potential for an organization to face  legal penalties ,  financial losses ,  reputational damage , or  operational disruptions  due to failure to comply with applicable  laws ,  regulations ,  industry standards , or  internal policies . Definition Compliance risk , also known as  integrity risk , arises when an organization fails to adhere to the legal, regulatory, and ethical standards relevant to its operations. This type of risk can impact an organisation’s earnings, capital, and reputation, potentially leading to  fines ,  lawsuits ,  business disruptions ,  loss of licenses , or  government sanctions . Key Elements Legal and Regulatory Requirements : Compliance risk includes failure to adhere to local, national, or international laws and regulations, such as those related to  financial reporting ,  data p...
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Detection risk

Detection risk is the risk that an auditor’s procedures will fail to detect a material misstatement in the financial statements. In other words, even if there are errors or fraud, the auditor might not find them due to limitations in the audit process. Key Points about Detection Risk: Auditor-Controlled : Unlike inherent and control risks, detection risk is influenced by the auditor’s actions—such as the quality of audit procedures and the level of professional skepticism. Inverse Relationship : The higher the inherent and control risks, the lower the detection risk should be (i.e., the auditor must perform more rigorous testing). Example: If a company has complex transactions (high inherent risk) and weak internal controls (high control risk), the auditor must reduce detection risk by performing more detailed and extensive audit procedures.
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Control risk

Control risk is the risk that a material misstatement in financial statements (or a failure in a process) will not be prevented, detected, or corrected promptly by the organisation’s internal controls. Key Aspects of Control Risk: Dependent on Internal Controls : It reflects the effectiveness (or ineffectiveness) of an organisation’s internal control systems. Assessed by Auditors : In auditing, control risk is evaluated to determine how much reliance can be placed on internal controls. Not Eliminated, Only Reduced : Even strong controls can’t eliminate all risk, but they can significantly reduce it. Example: If a company has weak segregation of duties in its accounting department, there's a higher control risk that errors or fraud could go undetected. Relationship to Other Risks: Control risk is one component of audit risk , which is typically broken down as: Audit Risk = Inherent Risk * Control Risk * Detection Risk
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Inherent risk

Inherent risk refers to the level of risk that exists in the absence of any controls or mitigation measures. It represents the natural level of risk associated with a particular activity, process, or environment before any actions are taken to reduce it. Key Points about Inherent Risk: Baseline Risk : It’s the starting point for risk analysis. Uncontrolled Risk : It assumes no safeguards, policies, or procedures are in place. Used in Auditing and Risk Management : Commonly used in financial auditing, cybersecurity, and operational risk assessments. Example: In a financial audit, the inherent risk might be high for a company that deals with complex financial instruments, even before considering internal controls like audits or compliance checks. Would you like to see how inherent risk compares with residual risk (the risk remaining after controls are applied)?
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