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CHAPTER 10 Flashcards

1
Q

Define risk

A

possible variation in outcome from what is expected to happen
Quantification of potential variability in a value based on past data

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2
Q

Define uncertainty

A

inability to predict outcome from an activity due to a lack of information
cannot be quantified

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3
Q

What are the four classes of uncertainty

A

clear enough futures
alternative futures
range of futures
true uncertainty

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4
Q

Uncertainty - what are clear enough futures

A

future can be assessed with reasonable accuracy as it follows on from the past without major change

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5
Q

Uncertainty - what are alternative futures

A

outcomes depend on an event

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6
Q

Uncertainty - what are range of futures

A

outcome varies according to a number of variables that interact

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7
Q

Uncertainty - what is true uncertainty

A

very high uncertainty due to the number and unpredictability of variables influencing the outcome

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8
Q

Why manage risk (CG)

A

SH need to feel confident BOD are aware of risks and there is a system to monitor and control.
Must be stated in reports

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9
Q

Define risk management

A

process of identifying and assessing (analysing and evaluating) risks and the development, implementation and monitoring of a strategy to respond to those risks

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10
Q

What does risk management involve

A

selection, implementation, monitoring and review of suitable risk treatments for each risk identified

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11
Q

What does effective risk management enable a business to do

A

reduce threats to acceptable levels
make informed decision about potential opportunities
Allows stakeholders to have confidence in business and future prospects

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12
Q

What should the effect of risk management be

A

to reduce probability and or consequences of failure while retaining as far as possible benefits of successes

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13
Q

What is central to risk management strategy

A

risk management policy

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14
Q

To implement any risk management strategy, what must be in place

A

effective system for risk management, risk reporting and communication involving all levels in the business

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15
Q

Risk management strategy must be a what kind of process

A

top down to ensure integrated

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16
Q

What are corporate codes of conduct, environmental policies H&S policies, financial controls, information systems control and cyber security measures, personnel controls and internal audit examples of

A

risk management policies

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17
Q

What do corporate codes of conduct do

A

regulate how managers and staff relate to each other and to outsiders and seek to control risk from discrimination, bullying bribery and ASB

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18
Q

What do environmental policies do

A

cover issues like energy use, emissions, recycling, waste disposal

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19
Q

What do health and safety policies do

A

require H&S officers at all levels, committees, requirement of routine testing and risk assessment, fire procedures

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20
Q

What are financial controls

A

budgetary controls to safeguard earnings and spending, capital expenditure, authorisation procedures, financial accounting systems, credit controls ash management, insurance of assets

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21
Q

What is in the risk management model

A

Risk appetite
risk identification
risk analysis
risk evaluation and response
risk monitoring and reporting
review process and feedback

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22
Q

Define risk appetite

A

extent to which a company is prepared to take on risks to achieve objectives

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23
Q

Influence of managerial culture - four strategic types of business defined by orientation of management to strategic challenges - what are they

A

defenders
prospectors
analyseres
reactors

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24
Q

characteristics of defendors

A

low risk
secure market
tried and tested solutions
cultures whose stories and rituals reflect historical continuity
decision taking is formalised
stress on efficiency

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25
Characteristics of prospectors
organisations where dominant belief more to do with results (effective) and take risks
26
Define analysers
try to balance risk and return, using a core of stable products and markets as a source of earnings to move into innovative prospects areas, follow change don't initiate it
27
Define reactors
do not have viable strategies, sub-optimal in performance
28
What are other influences in risk appetite
Expectation of SH attitudes organisational nationality regulatory framework nature of ownership personal views
29
Define controllable risk
risk factors in ability of management to control to some extent. often relate to internal factors and may be easier to directly manage
30
define uncontrollable risk
risks outside of the organisations direct control, tend to be driven by external changes, include changes in economic conditions and advances in technology
31
Are controllable and uncontrollable risks types of risk
no - forms which various risks can take
32
Define entity risk
all the risks that affect an entity (how it trades, markets and countries, decisions made by management... everything makes up entity risk)
33
define business risk
variability of returns due to how a business trades or operates
34
Define strategic risk
risk associated with LT strategic objectives of the business, potential variability of returns as a result of strategy and strategic position with respect to competitors, customers, reputation, legal or regulatory change. encompasses knowledge management
35
Define operational risk
Variability arising from effectiveness of how the business is managed and controlled on day to day basis, accuracy and effectiveness of inforamtion/accounting systems, reporting systems, management and control structures Inc compliance issues
36
Define Hazard risk
exposure to natural events and ipacts
37
define financial risk
due to how the business choses to finance itself
38
Risk categorisation - BOSHFC
Business (operational Strategic Hazard) Financial and Compliance risk
39
Financial risk tends to xx inherent business risk at low levels of gearing
amplify
40
Define compliance risk
risk arising from non-compliance with laws/regulations
41
define cyber risk
risk of financial loss, disruption or reputational damage from some sort of failure of IT Systems
42
Define climate risk
risk posed to an organisation and society from changes in global temperatures, resulting in different weather patterns and systems
43
Examples of climate related issues
scarce resources impact on operations damaged supply chains costal erosion increased insurance reputational damage
44
techniques to identify risk
risk sources and risk events
45
What are risk sources
cause of potential problems, things that may give rise to risk that may trigger an event. can be in or external. management deal with source
46
what are risk events (problems)
specific, identified threats or events themselves, deal with problem
47
Define risk register
lists and prioritises main risks the organisation faces, used as the basis for decision making on how to deal with risks
48
What is done at the risk analysis stage
risk assessment
49
define risk assessment
involves establishing financial consequences and the likelihood of occurrence of each risk event
50
How can do risk profiling
severity / frequency matrix
51
Low severity low frequency
Accept
52
Low severity High frequency
reduce
53
High severity low frequency
transfer
54
High frequency high severity
Avoid
55
Define risk evaluation
process by which an organisation determines the significance of any risk and whether they need to be addressed
56
What should risk evaluation be carried out for
new business proposals and changes to operations and existing business operations
57
Once risk analysis has been completed and risk tolerance established and accounted for, what should management do
compare risks and risk criteria established by the business to determine if risk should be accepted or treated
58
Define risk avoidance
not undertaking or terminating an activity that carries risk (High frequency high severity)
59
Risk reduction
Retaining activity, undertake action to contain it e.g. preventative, corrective, directive or detective control Low severity high frequency
60
What are directive controls
controls designed to ensure a partiucarl outcome is achieved
61
What is risk transfer
transfer to third party either contractually or by hiding High severity low frequency
62
What is risk acceptance
tolerate losses when they arise low frequency low severity
63
Any system of risk treatment should as a minimum provide
effective and efficient operation of the organisation effective internal controls compliance with laws and regs
64
How to assess effectiveness of internal control
degree to which it will either reduce or eliminate associated risk
65
Why must risk be monitored and reviewed
to monitor effectiveness of current process to monitor whether risk profile has changed or not
66
What should monitoring and review process establish
adopted controls achieve desired result procedures adopted and information gathered for undertaking assessment were appropriate improved knowledge would have helped to reach better decisions, identifying what lessons could be learned for future assessments
67
FRC how should board report on risk
in annual report and accounts on review of effective of company risk management and IC system in statement acknowledge responsibility for systems and reviewing effectiveness
68
How can uncertainty be dealt with
break even best / worst scenario analysis sensitivity analysis trend analysis
69
How does trend analysis work
aim to uncover patterns in data to predict future trends and support strategic decision making
70
What is sensitive analysis
change value of one variable to test impact on financial result - priority setting
71
Weaknesses of sensitivity analysis
Only examines risk relating to one variable at a time - not realistic measures extent of change to break even, not likelihood
72
Break even point(units)
= Fixed cost/Contribution per unit
73
Margin of safety
(Planned output-breakeven output)/Planned output
74
What does a higher margin of safety mean
less sensitive profits are to sudden fall in volume
75
Benefits of breakeven analsysis
relationship between FC, variable costs, activity
76
Issues with break even analysis
Assumes linear relationship assumes fixed costs (more likely stepped) Multi product business - hard to identify which FC belongs to which prodcut
77
When is scenario building used
to develop contingency plans as a prediction technique
78
Approaches to choosing sceanrios
most probable hope for the best hedge flexibility influence
79
What are relevant cash flows
future, incremental cash flows arising from decision being made
80
Should finance costs be included in relevant costs
no - discount rate already takes account of them
81
What Is opportunity cost
cash flow foregone if unit of resource used on contract/project instead of best alternative way
82
What is deprival value of assets
lower of replacement cost and recoverable amount
83
What is recoverable amount
higher of value in use and net realisable value
84
If NRV > economic value
sell it
85
What is probability calculation
number of ways of achieving result / total number of possible outocmes
86
What are mutually exclusive outcomes
occurrence of one excludes possibility of others
87
What are independent events
events for which the outcome of one does not affect the outcome of the other
88
Limitations of expected values
probabilities are estimates long term averages and not good for one off decisions do not consider attitude to risk TV of money not taken into account
89
What is standard deviation
amount of variability in the data set, how far on average each result lies from mean
90
Coefficient of variation
ration of SD to mean and = SD/Mean
91
Normal distribution - 1 SD above / below mean
68.3%
92
Normal distribution - 2 SD above/below the mean
95.4%
93
Normal distribution 3SD above/below mean
99.7%
94
Define regression analsysi
aims to specify relationship between 2/+ variables one of these is dependent, whose value depends on independent variable
95
Define correlation
measure of the extent to which change in dependent variable are explained by changes in independent variable
96
Y is the
dependent variable
97
x is the
independent variable
98
Correlation coefficient define
statistical measure o strength of relationship between relative movement of two variables - what portion of change in y is explained by change in x
99
What is data bias
not representative of the popultaion
100
What is selection bias
bias caused by lack of random data so sample is not representative of the population
101
What is self selection bias
individuals have the chance to select themselves to appear in population of data
102
What is observer bias
occurs when individual observing and recording results allows their assumptions to influence observations
103
What is omitted variable bias
occurs when a variable isexcldued from the data model and cause of change in one is incorrectly attributed to another
104
What is cognitive bias
human perception - individuals interpret and understand information differently based on background, experiences and beliefs.
105
What is confirmation bias
people see data that confirms their bias and ignores data that disagrees
106
What is survivorship bias
tendency towards studying successful outcomes while excluding unsuccessful outcomes
107
What is business continuity planning
process through which business details how and when it will recover and restore any operations interrupted by the occurrence of rare, but massive risk event
108

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