Banks and other large financial services organizations rely extensively on mathematical models to make business decisions and meet regulatory requirements. Models are inherently risky because they apply statistical, economic, financial, or mathematical theories, which require the use of assumptions based on judgment, to yield estimates of real‐world financial events. This process can lead to imprecise or inaccurate results. Additionally, errors can be introduced throughout the life cycle of the model from errors in input data to incorrect calculations and inappropriate Application of the model and its results.
The growing dependence of organizations on quantitative analytical models has brought increased regulatory attention to effective model risk management (MRM). As regulatory scrutiny around model risk management increases, the internal audit activity plays a key role in assessing an organization’s MRM framework.
This guidance provides an overview of the internal audit activity’s responsibilities related to MRM and describes methods and processes internal auditors can use to review the design, implementation, and operation of their organization’s MRM framework.
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