Chapter 1 - Risk Flashcards
What is risk?
Chance that future events or results may not be as expected
Can be defined as the combination of the probability of an event and its consequences
What is CIMA’s definition of risk?
Risk is a condition in which there exists a quantifiable dispersion in the possible outcomes from any activity
Why do companies take risks?
Increase financial return
Gain competitive advantage
What are the 6 steps in CIMA’s risk management cycle?
Identify risk areas
Understand and assess scale of risk
Development of risk response strategy
Implement strategy and allocate responsibilities
Implementation and monitoring of controls
Review and refine process and do it again
What is political risk?
Risk due to political instability
What is legal/litigation risk?
Risk that litigation will be brought against the business
What is regulatory risk?
Risk of changes in regulation affecting the business
What is compliance risk?
Risk of non-compliance with the law resulting in fines, penalties, etc.
What are the 6 business risks?
Strategic risk
Product risk
Commodity price risk
Product reputation risk
Operational risk
Contractual inadequacy risk
What is strategic risk?
Risk that business strategies will fail
What is product risk?
Risk of failure of new products or loss of interest in existing products
What is commodity price risk?
Risk of a rise in commodity prices e.g. oil
What is product reputation risk?
Risk of change in product’s reputation or image
What is operational risk?
Risk that business operations may be ineffiecient or business changes may fail
What is contractual inadequacy risk?
Risk that the terms of a contract do not fully cover a business against all potential outcomes
What is economic risk?
Risk that changes in the economy might affect the business
What are the five types of financial risk?
Credit risk
Political risk
Currency risk
Interest rate risk
Gearing risk
What is credit risk?
Risk of non-payment by customers
What is political risk?
Risk arising from actions taken by government that affect financial aspects of the business
What is currency risk?
Risk of fluctuations in the exchange rate
What is interest rate risk?
Risk that interest rates change
What is gearing risk?
Risk in the way a business is financed (Debt v equity)
What is technological risk?
Risk that technological changes will occur that either present new opportunities to businesses, or on the down-side make their existing processes obsolete or inefficient
What is environmental risk?
Risk that arises from changes in the environment such as climate change or natural disasters
What is reputation risk?
Reputation risk is for many organisations a down-side risk as the better the reputation of the business the more risk there is of losing that reputation
What is fraud risk?
Risk that is the vulnerability of an organisation to fraud
What is employee malfaesance risk?
Risk that an organisation might be exposed to actions by employees that result in an offence or crime
What is risks in international operations?
International business are subject to additional risk factors relating to culture, litigation, credit risk, items in transit and financial risk
