Which type of risk is associated with the failure of internal controls?

Operational risk is indeed the type of risk associated with the failure of internal controls. This category of risk encompasses the potential for loss resulting from inadequate or failed internal processes, people, systems, or external events. It directly relates to the effectiveness and reliability of a company's internal control systems.

When internal controls fail, it can lead to various operational issues, such as erroneous financial reporting, fraud, and losses due to mismanaged processes. For example, if the controls designed to safeguard assets or ensure accurate financial reporting are not functioning properly, it can directly affect the organization’s ability to operate effectively and manage financial information accurately.

In contrast, other types of risk like market risk pertains to fluctuations in the value of investments due to market changes, credit risk involves the possibility of loss due to a borrower's failure to repay a loan, and compliance risk deals with potential legal penalties or regulatory sanctions arising from failure to comply with laws and regulations. While these are all important considerations within an organization’s risk management framework, they do not specifically relate to the malfunctioning of internal controls in the same way operational risk does.