Chp 1 - Introduction to Risk Flashcards
Define Risk
Risk is a condition in which there exists a quantifiable dispersion in the possible outcomes from any activity.
What are the four main types of Risk
- Fundamental Risks
- Particular Risks
- Speculative Risks
- Pure Risks
Define Fundamental Risks
Fundamental risks are those that affect society in general, or board groups of people, and are beyond the control of any one individual.
Define Particular Risks
Particular risks are over which an individual may have some measure of control.
Define Speculative Risks
Speculative risks are those from which either good (upside risks) or harm (downside risks) may result.
Define Pure Risks
Pure risks are those whose only possible outcome is harmful. The risk of damage to property by fire is a pure risk b/c no gain can result from it.
What are the four different categories of risk?
- Financial Risks
- Operational Risks
- Strategic Risks
- Hazard Risks
Define Strategic Risk
Strategic Risk is the potential of volatility of profits caused by the nature and type of the business.
What are the different types of short-term financial risk?
- Credit Risk
- Liquidity Risk
- Cash Management Risk
What are the different types of long-term financial risk?
- Interest rate risks
- Currency risks
- Market risks
Define Currency Risks
Currency risk is the possibility of loss or gain due to future changes in exchange rates.
Define Market Risk
Market risk is a risk of loss due to an adverse move in the market value of an asset - a stock, a bond, a loan, foreign exchange or commodity - or a derivative contract linked to these assets.
Define Operational Risks
Operational or process risk is the risk of loss from a failure of internal business and control processes (ie what can go wrong on a day-to-day basis).
Define Hazards
A hazard can be defined as a possible source of danger and can be categorised as natural or human.
What are the different sources of risk?
- Environment
- Economic
- Business
- Product
- Political, Cultural & Legal
- Financial
- Reputation
- Relationships
Define Risk Appetite
Risk appetite is the nature and strengths of risk that an organisation is prepared to bear.
Define Risk Attitude
Risk attitude is the directors’ views on the level of risk that they consider desirable.
Define Risk Capacity
Risk capacity describes the nature and strengths of risk that an organisation is able to bear.
What are the four risk viewpoints?
- Fatalists
- Hierarchists
- Individualists
- Egalitarians
What are the two different attitudes towards risk?
- Aversion
- Seeking
What are the common components of the risk assessment framework?
- Identification
- Analysis
- Mapping
- Consolidation
What are the different means of identifying risk conditions?
- Physical inspection
- Enquiries
- Checking
- Brainstorming
- Checklists
- Benchmarking
- Human reliability analysis
How do you calculate debt ratio?
Total debt/Total assets x 100
How do you calculate Gearing Ratio?
Interest bearing Debt/(Shareholders’ Equity + Interest Bearing Debt) x 100%
How do you calculate Interest Cover?
Profit before Interest and Tax / Interest Charges
How do you calculate the Cash Flow Ratio?
Net Cash Inflow / Total Debts
How do you calculate the Current Ratio?
Current Assets / Current Liabilities
How do you calculate the Quick Ratio?
Current Assets - Inventory / Current Liabilities
Define ‘Expected Value’
Expected value is the financial forecast of the outcome of a course of action multiplied by the probability of achieving that outcome. The probability is expressed as a value ranging from 0 to 1.
Define ‘Sensitivity Analysis’
Sensitivity Analysis is a modelling and risk assessment procedure in which changes are made to significant variables in order to determine the effect of these changes on the planned outcome. Particular attention is then paid to variables identified as being of special significance.
What are the common options for managing risk?
The TARA model
- Transfer
- Avoid
- Reduce
- Accept
What is risk transfer?
Risks can be transferred to other internal departments or externally to suppliers, customers or insurers. Risk transfer can even be to the state.
What is risk avoidance?
Abandoning operations in order to avoid the risk altogether.
What is risk reduction?
Ie The risk of launching a new product is reduced by market research and advertising.
What are the three elements of contingency planning?
- Information
- Responsibilities
- Practice
What is risk acceptance?
Risk acceptance is where the organisation bears the risk itself.
What is Enterprise Risk Management (ERM)?
ERM is 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 risks to be within its risk appetite, in order to provide reasonable assurance regarding the achievement of entity objectives.
What are the characteristics of ERM?
- Process
- Operated at every level
- Applied in strategy setting
- Applied across the enterprise
- Identifies key events and manage their risks
What are the 8 interrelated components of the COSO framework?
- Internal environment
- Objective setting
- Event identification
- Risk assessment
- Risk response
- Control activities
- Information and communication
- Monitoring
What are the four different categories of objectives (COSO)?
- Strategic
- Operational
- Reporting
- Compliance
What are the benefits of the COSO framework?
- Alignment of risk appetite and strategy
- Link growth, risk and return
- Choose best risk response
- Minimise surprises and losses
- Identify and manage risks across the organisation
- Seize opportunities
- Rationalise capital
What are the criticisms of the COSO framework?
- Internal focus
- Risk identification
- Risk assessment
- Stakeholders
What are the 8 components of the risk architecture as developed by IFAC?
- Acceptance of a risk management framework
- Commitment from executives
- Establishment of a risk response strategy
- Assignment of responsibility for risk management process
- Resourcing
- Communication and training
- Reinforcing risk cultures through human resources mechanisms
- Monitoring of the risk management process
What are the four components of risk management as identified by IFAC?
- Structure
- Resources
- Culture
- Tools and Techniques
What is ‘Net, or Residual Risk’?
Net, or Residual risk is the risk remaining after actions have been taken to manage risks.
