Chapter 2 - Risk Management

Question 1

What is risk management?

Answer 1

Process of understanding and managing the risks that the organisation is inevitably subject to in attempting to achieve its corporate objectives

Question 2

What is conformance?

Answer 2

Avoiding downside risk
Controlling hazards or threats
‘bad things do happen’

Question 3

What is performance?

Answer 3

Benefitting from upside risk
Maximising return or opportunity
‘good things might not happen’

Question 4

What is enterprise risk management (ERM)

Answer 4

‘A process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objective.

Question 5

What is the eight components of the COSO ERM framework?

Answer 5

Internal environment
Objective setting
Event identification
Risk assessment
Risk response
Control activities
Information & communication
Monitoring

Question 6

What is the five components of the ERM-intergrating strategy and performance?

Answer 6

Governance and culture
Strategy and objective setting
Performance
Review and revision
Information, communication and reporting

Question 7

What is the benefits of ERM?

Answer 7

Enhanced decision making by intergrating risks
Improvement in investor confidence, and hence shareholder value
Focus of management attention on the most significant risks
A common language of risk management
Reduced cost of finance

Question 8

What is risk appetite?

Answer 8

Amount of risk an organisation is willing to accept in pursuit of value

Question 9

What is risk capacity?

Answer 9

Amount of risk that the organisation can bear

Question 10

What is risk attitude?

Answer 10

Overall approach to risk, in terms of the board being risk averse or risk seeking

Question 11

What is residual risk?

Answer 11

Risk that business faces after its controls have been considered

Question 12

What are the features of a risk management strategy?

Answer 12

Statement of organisations attitude to risk
Risk appetite of the organisation
Objective of the risk management strategy
Culture of the organisation in relation to risk
Responsibilities of managers
References should be made to the risk management systems the company uses
Performance criteria should be set so that the effectiveness of risk management can be evaluated

Question 13

What are the four objectives of ERM?

Answer 13

Strategic
Operating
Reporting
Compliance