Expert verified A Risk Control Matrix (RCM) is a structured document used in risk management and internal audit to:
- Identify risks within a business process,
- Define controls to mitigate those risks,
- Help assess whether the controls are adequate, effective, and implemented properly.
It is a core tool used in Internal Financial Controls (IFC), SOX compliance, and internal audit.
What is Risk ?
A Risk is a potential event or condition that may cause:
- Financial loss
- Operational disruption
- Regulatory non-compliance
- Reputational damage
What is Control ?
A Control is an activity, procedure, or system implemented to prevent, detect, or correct a risk.
Controls can be:
- Preventive (to stop the risk)
- Detective (to find if the risk happened)
- Corrective (to fix the issue after it happened)
Now, We Shall see some of Risks and Controls involved in the various business processes below :
PROCURE-TO-PAY
🔴 Risk: Unauthorised Purchases
There is a risk that purchases may be made without proper approval, which can lead to unnecessary expenses or buying items that don’t align with company needs. This can also cause budget overruns and affect financial planning.
🛡 Control:
Implement a mandatory approval workflow requiring all purchase requests to be reviewed and authorized by designated managers or department heads before any order is placed. Use automated systems to track approvals and maintain audit trails.
💡 Example:
An employee in the marketing team orders expensive software tools without informing their manager. The system flags this purchase, and the department head reviews and rejects it since the software was not budgeted for that quarter.
🔴 Risk: Duplicate Payments
Duplicate payments can occur when the same invoice is processed more than once, causing avoidable financial losses. This often happens due to manual invoice entry errors or weak invoice verification procedures.
🛡 Control:
Use automated invoice matching software that scans invoice details to detect duplicates. Regularly reconcile vendor statements with payments made, and require dual verification before releasing payments.
💡 Example:
Two invoices from a supplier arrive, one sent by email and the other by mail. The finance team’s software automatically flags the second invoice as a duplicate, preventing the company from paying twice for the same shipment.
🔴 Risk: Fraudulent Vendor Invoices
There is a risk of receiving and paying fake or inflated invoices from vendors, which directly impacts the company’s financial health and can go unnoticed without proper checks.
🛡 Control:
Maintain a list of approved vendors, and ensure that all invoices are matched with purchase orders and delivery receipts before processing payments. Any discrepancies should trigger an investigation or hold payment.
💡 Example:
A vendor submits an invoice for goods never delivered. The finance team cross-checks the invoice against the purchase order and delivery note, spots the inconsistency, and holds the payment while they contact the vendor for clarification.
🔴 Risk: Lack of Segregation of Duties
When a single employee controls multiple stages of purchasing, approval, and payment, it increases the risk of fraud or errors going undetected, as checks and balances are missing.
🛡 Control:
Segregate duties by assigning different employees to raise purchase requests, approve purchases, and process payments. Periodically review roles and responsibilities to ensure compliance with this separation.
💡 Example:
Employee A creates a purchase order but cannot approve it or release payment. Employee B, who does not raise orders, approves them, and Employee C processes payments, ensuring no one person can complete the entire cycle alone.
ORDER-TO-CASH
🔴 Risk: Incorrect Order Processing
There is a risk that orders may be processed inaccurately, leading to wrong products, quantities, or pricing being delivered to customers. This can harm customer satisfaction and cause financial discrepancies.
🛡 Control:
Implement system validations and order review steps to verify order details before confirmation. Regular training for order entry staff ensures accuracy and awareness of common errors.
💡 Example:
A customer orders 100 units, but due to a data entry error, 10 units are entered. The system flags the order for review, and the error is corrected before shipment, preventing customer dissatisfaction.
🔴 Risk: Delayed Invoicing
Delays in sending invoices can impact cash flow and customer relations, causing late payments and difficulties in financial forecasting.
🛡 Control:
Automate the invoicing process to trigger invoice generation immediately after order fulfilment. Monitor invoicing timelines regularly and set alerts for any delays.
💡 Example:
A sales order is fulfilled on May 1st, but the invoice is only sent on May 15th due to manual processing. After automation is implemented, invoices are sent within 24 hours, improving payment cycles.
🔴 Risk: Duplicate / Fraudulent Invoices
Duplicate or fraudulent invoices may be submitted, leading to overpayments or payments for goods and services not provided.
🛡 Control:
Use invoice matching software to detect duplicates and maintain an approved customer order database. Conduct periodic audits to verify invoice authenticity.
💡 Example:
Two invoices with the same order number arrive from a vendor. The system detects the duplicate, holds the payment, and notifies finance for review before release.
🔴 Risk: Returns and Refund Mismanagement
Improper handling of product returns and refunds can cause financial losses and damage customer trust.
🛡 Control:
Establish clear return policies with documented approval processes. Track all returns and refunds in the system with authorization from the finance team before processing.
💡 Example:
A customer returns damaged goods and requests a refund. The return is logged, inspected by quality control, and the refund is only processed after management approval.
INVENTORY MANAGEMENT
🔴 Risk: Inaccurate Inventory Records
Discrepancies between physical stock and system records can lead to stockouts, overstocking, or delays in fulfilling orders.
🛡 Control:
Conduct periodic physical stock counts and reconcile them with system records. Use inventory management software with real-time tracking to minimize errors.
💡 Example:
The system shows 500 units in stock, but a manual count reveals only 470. After reconciliation, the shortfall is investigated and future counts are scheduled monthly.
🔴 Risk: Risk in Goods in Transit
Inventory may be lost, damaged, or delayed during transit, affecting order fulfilment and resulting in financial losses.
🛡 Control:
Use reliable logistics partners and track shipments through GPS or shipment IDs. Insure goods in transit and document handovers at each stage.
💡 Example:
A consignment is delayed due to a misroute. With live tracking, the operations team locates the issue and reroutes it to avoid disruption in delivery.
🔴 Risk: Inaccurate Costing
If inventory costs are recorded inaccurately, it may result in incorrect pricing, profitability issues, and misstated financials.
🛡 Control:
Adopt standard costing or FIFO or Weighed Average methods and review cost entries regularly. Automate costing through ERP systems to reduce manual errors.
💡 Example:
Due to outdated cost entries, a product is sold below cost. After switching to system-based FIFO costing, pricing is adjusted to maintain profit margins.
🔴 Risk: Improper Handling and Storage
Poor storage or handling can lead to product damage, spoilage, or safety issues, especially with perishable or fragile items.
🛡 Control:
Train staff on handling procedures, and store goods according to their specific requirements (temperature, stacking, etc.). Conduct periodic checks for compliance.
💡 Example:
Pharmaceuticals are stored at room temperature instead of the required cool environment. After implementing proper storage protocols, spoilage incidents drop significantly.
PAYROLL PROCESS
🔴 Risk: Incorrect Payroll Calculations
Errors in payroll calculations can result in overpayment, underpayment, or employee dissatisfaction, and may affect compliance and reporting.
🛡 Control:
Use automated payroll software integrated with attendance and leave records. Perform monthly payroll audits and set up approval workflows before disbursement.
💡 Example:
An employee’s overtime wasn’t included in the payout due to manual entry. After integrating timesheets with payroll software, such discrepancies were eliminated.
🔴 Risk: Ghost Employees / Fraudulent Payments
There’s a risk of making payments to non-existent or former employees, leading to direct financial loss and fraudulent payroll activity.
🛡 Control:
Conduct regular audits of employee records and link payroll with biometric attendance and HR data to verify active employment status.
💡 Example:
A terminated employee continues to receive salary for two months. After linking HR records to the payroll system, their name is auto-removed post-exit clearance.
🔴 Risk: Non-Compliance with Tax and Labor Laws
Failure to comply with statutory tax deductions, filings, or labour regulations can result in penalties and legal issues.
🛡 Control:
Ensure payroll systems are updated with the latest statutory rules. Assign responsibility to a compliance officer to oversee filings and deduction accuracy.
💡 Example:
An outdated PF slab led to short deduction and a penalty notice. Post rectification, the company enabled auto-updates and monthly compliance checks.
🔴 Risk: Late Payroll Processing
Delays in processing salaries may lead to employee dissatisfaction, operational disruptions, and loss of trust.
🛡 Control:
Set fixed payroll cycles with clear internal deadlines and automated processing reminders. Maintain backup staff and systems to avoid delays.
💡 Example:
Due to a key employee’s leave, salaries were delayed. After assigning backups and automating scheduling, payroll continued smoothly even during absences.
PRODUCTION PROCESS
🔴 Risk: Poor Quality Output / Defective Products
Producing substandard or defective items can lead to increased rework costs, customer complaints, and damage to brand reputation.
🛡 Control:
Implement quality control (QC) checks at each production stage and follow standard operating procedures (SOPs). Use automated alerts for defect thresholds.
💡 Example:
A batch of electronics is released without final QC, leading to multiple customer returns. QC gates are later introduced at every critical stage, significantly reducing defect rates.
🔴 Risk: Inaccurate Production Planning
Misjudging material needs, timelines, or capacity can lead to overproduction, shortages, or missed deadlines, affecting both cost and delivery.
🛡 Control:
Use production planning software integrated with inventory and sales data. Conduct regular demand forecasting and capacity reviews.
💡 Example:
Due to overestimating demand, raw material was overstocked and expired unused. After implementing demand-based planning, procurement aligned better with actual needs.
🔴 Risk: Unskilled or Inadequately Trained Workforce
Lack of proper skills or training can cause errors, reduce efficiency, and increase safety risks on the production floor.
🛡 Control:
Conduct regular training programs, maintain skill matrices, and assign tasks based on certification or training history. Monitor performance for early intervention.
💡 Example:
A machine was damaged due to improper operation by a newly hired worker. The company introduced a mandatory hands-on training program for all new operators.
🔴 Risk: Unauthorized Access to Production Systems
Unrestricted access to production controls or systems can lead to data tampering, disruptions, or deliberate sabotage.
🛡 Control:
Restrict system access using role-based permissions. Maintain audit trails and use two-factor authentication for critical system actions.
💡 Example:
A technician accidentally altered machine settings, halting production. After applying access controls, only supervisors can now modify critical parameters.
